Kernel Holding S.A. Annual Report 30 June 2016

Transcription

1 Kernel Holding S.A. Annual 30 June 2016

2 Contents Strategic Strategic 03 Key Highlights 04 Operating Highlights 06 Chairman s Statement 08 Kernel at a Glance 10 Our Business Model 11 Our Strategy 12 Performance in FY Sunflower Oil 21 Grain and Infrastructure 26 Farming 31 Risks and Uncertainties 35 Sustainability Board of Directors of the Réviseur d Enterprises Agréé 61 Statement of Management Responsibilities 62 Selected Data 63 Consolidated Statement of Position 64 Consolidated Statement of Profit or Loss 65 Consolidated Statement of Profit or Loss and Other Comprehensive Income 66 Consolidated Statement of Changes in Equity 67 Consolidated Statement of Cash Flows 68 Notes to the Consolidated 117 Information Kernel is a diversified agricultural business in the Black Sea region, listed on the main market of the Warsaw Stock Exchange. We are the largest sunflower oil producer in the region, a leading exporter of grains and oilseeds, operator of an extensive agriculture logistics asset base and one of the largest farmers. Each year we supply in excess of seven million tons of agricultural products across the world. Kernel Holding S.A. Annual and Accounts 30 June

3 Key Highlights USD million except ratios and EPS FY2016 FY y-o-y Income statement highlights Revenue 1, ,329.5 (14.6%) EBITDA (12.7%) Net profit/(loss) attributable to equity holders of Kernel Holding S.A x EBITDA margin 17.4% 17.0% 0.4pp Net margin 11.3% 4.6% 6.7pp EPS, USD x Cash flow highlights Operating profit before working capital canges (2.4%) Changes in working capital (136.3) n/m Cash generated from operations (60.1%) Net cash generated by operating activities (67.0%) Net cash used in investing activities (60.7) (24.3) 2.5x Credit metrics Net interest-bearing debt (16.7%) Readily marketable inventories % Adjusted net debt (50.3%) Shareholders equity % Net debt/ebitda 0.8x 0.9x (0.1x) Adjusted net debt 2 /EBITDA 0.3x 0.5x (0.2x) EBITDA/Interest 6.1x 5.8x 0.3x Non-financial highlights Full-time employees at 30 June 14,075 15,229 (7.6%) Injury frequency rate, accidents per million worked hours (19.7%) Social spending, USD million (13.1%) Direct greenhouse gas emissions, thousand tons of CO 2 equivalent (16.6%) Total energy consumption, thousand gigajoules 5, ,026.0 (14.8%) Note: year ends 30 June. 1 Hereinafter, FY2015 figures exclude adjustments for discontinued operations, outlined in Note 14 of the 2 Hereinafter, EBITDA is calculated as the sum of the profit from operating activities plus amortization and depreciation. 3 Adjusted net financial debt is the sum of short-term interest-bearing debt, current maturities of long-term interest-bearing debt and long-term interest-bearing debt, less cash and cash equivalents, marketable securities and readily marketable inventories at cost. Source: Kernel. EBITDA (USD million) Net cash from operations (USD million) Net debt/ebitda 3.1x (24.0) x 2.3x 0.9x 0.8x FY2012 FY2013 FY2014 FY2015 FY2016 FY2012 FY2013 FY2014 FY2015 FY2016 FY2012 FY2013 FY2014 FY2015 FY2016 Source: Kernel. Kernel Holding S.A. Annual and Accounts 30 June

4 Operating Highlights Sunflower oil sold in bulk (thousand tons) Sunflower oil sold bottled (million liters) Grain sales (thousand tons) ,123 3,022 4,244 4,744 4,409 FY2012 FY2013 FY2014 FY2015 FY2016 FY2012 FY2013 FY2014 FY2015 FY2016 FY2012 FY2013 FY2014 FY2015 FY2016 FY2016 performance While we crushed a record 2.7 million tons of sunflower in FY2016, in line with our initial plan, bulk oil sales declined by 5% y-o-y as some bulk oil sales were contracted to Q1 FY2017. FY2016 performance Our domestic sales of sunflower oil continued to face a dramatic decrease in purchasing power in Ukraine, as local currency depreciates further. A 5% y-o-y decrease in sales was partly compensated with increased export sales, thus opening new markets for this segment. Export markets accounted for 51% of total bottled oil sales in FY2016. FY2016 performance Grain sales stood at 7% lower y-o-y, as farmers were slow sellers in the first half of the season. The grain sales reached a record volume in Q3, delivering a stunning 1.4 million tons (6% up y-o-y) following the reinstatement of VAT refunds on grain exports, which increased the farm gate prices. Sunflower oil sold in bulk EBITDA (USD/ton, %) Bottled sunflower oil EBITDA (USD/thousand liters, %) Grain segment EBITDA (USD/ton, %) % 11% 14% 18% 11% 16% 14% 20% 18% 15% 5% 4.1 1% 6% 6% 6% FY2012 FY2013 FY2014 FY2015 FY2016 FY2012 FY2013 FY2014 FY2015 FY2016 FY2012 FY2013 FY2014 FY2015 FY2016 The sunflower oil sold in the bulk segment s EBITDA divided by tonnage of sunflower oil sold in bulk or as a percentage of revenues. The bottled sunflower oil segment s EBITDA divided by volumes of bottled sunflower oil sold measured in thousand liters or as a percentage of revenues. The grain segment s EBITDA divided by tonnage of corn, wheat, barley, soybean and rapeseed sold or as a percentage of revenues. FY2016 performance The crushing margins experienced a marketwide contraction stemming from an imbalance between supply and demand of sunflower seeds, as new crushing facilities have been commissioned. Hence, our EBITDA margin declined to 11% from 18% a year ago. FY2016 performance Further devaluation of the Ukrainian hryvnia and the depreciation of purchasing power of local customers have reduced demand for bottled oil in domestic markets, prompting export sales, which accounted for 51% in FY2016, thus sustaining our EBITDA to the previous year results. FY2016 performance Even though Ukraine s grain supply marginally declined from the previous year, we managed to ensure the profitability of our merchandising activities, holding our EBITDA margin at a firm 6% in FY Kernel Holding S.A. Annual and Accounts 30 June

5 Operating Highlights continued Grain received in inland silos (thousand tons) Export terminal throughput (thousand tons) Acreage harvested (thousand hectares) 2,059 1,737 2,586 2,523 2,820 1,809 3,209 3,926 4,822 5, FY2012 FY2013 FY2014 FY2015 FY2016 FY2012 FY2013 FY2014 FY2015 FY2016 FY2012 FY2013 FY2014 FY2015 FY2016 FY2016 performance Grain received in inland silos showed a strong 14% y-o-y increase to 2.8 million stemming from larger in-house crop production and our effort to attract more third-party farmers to our silos. FY2016 performance The volume of grains transshipped through our ports has reached a record of 5.3 million tons, up 11% y-o-y, caused primarily through efficient utilization and debottlenecking of our storage and intake facilities at our terminals. FY2016 performance Our harvested area remained relatively unchanged, up a mere 1%, as our crop mix and production approach remained intact. Silo services EBITDA (USD/ton, %) Export terminals EBITDA (USD/ton, %) Farming segment EBITDA (USD/hectare, %) % 65% 7 47% 55% 60% 36% 42% 53% 43% 61% FY2012 FY2013 FY2014 FY2015 FY2016 FY2012 FY2013 FY2014 FY2015 FY % 41% 35% (116) 32% (15%) FY2012 FY2013 FY2014 FY2015 FY2016 The silo services segment s EBITDA divided by throughput for the full financial year or as a percentage of revenues. Services provided intra-group were accounted for on an arm slength basis. FY2016 performance A 14% increase in EBITDA per ton was driven by further devaluation of the Ukrainian hryvnia and lower natural gas prices. EBITDA derived from providing transshipment services by our export terminals in Ukraine divided by their throughput volumes for the full financial year. Services provided intra-group were accounted for on an arm s-length basis. Excludes Taman volumes and earnings, which are reported under the equity method of accounting. FY2016 performance Continued depreciation of the national currency and record level of volumes transshipped has allowed us to retain our EBITDA of USD 10 per ton of grain transshipped. The farming segment s EBITDA divided by average acreage during the period. FY2016 performance Strong crop yields and reinstatement of VAT on grain exports, which increased farm gate prices along with decreased production costs, driven by lower labor and energy cost were the primary reasons for the cost-driven improvement in EBITDA. Kernel Holding S.A. Annual and Accounts 30 June

6 Chairman s Statement Strategic Andriy Verevskyy Chairman of the board of directors Dear Shareholders and Colleagues, It is my pleasure to report the annual results for the year ended 30 June 2016, another strong year for Kernel. We posted a record net profit of USD 225 million; we crushed a record volume of sunflower seeds; we handled a record volume of soft commodities through our export terminals; we achieved another year of record earnings in our farming division; we generated strong free cash flows, further deleveraging the balance sheet with net debt/ebitda of 0.8x as of 30 June 2016, another new record for us. FY2016 was not free of headwinds, however. In the sunflower oil business, we experienced a challenging season as a material imbalance in supply and demand for sunflower seeds substantially squeezed our crushing margins. In line with our initial expectations, the launch of new capacities in the market increased demand for sunflower seeds. Secondly, farmers have been particularly slow in regard to selling their sunflower seed this year. As a result, the oilseed supply was limited during the peak of the procurement season, further weakening the margin. Lastly, the tolling agreement partially diluted the profitability. Still, we were capable to crush a record volume of sunflower seeds owing to the expansion of our asset base through the acquisition of a 560,000 ton crushing plant and signing the tolling agreement for an additional 260,000 ton. The bottled oil segment reallocated a substantial part of weak domestic demand to international markets. Overall, our sunflower oil business contributed EBITDA of USD 129 million this year, 39% less than a year ago. Our grain and infrastructure business performed well during the year, both in volumes and earnings as comparably strong crops in Ukraine and Russia supported healthy activity. Grain export terminals handled a record volume of 5.3 tons, delivering almost an 11% growth in volumes with stable margins. At the same time, grain export volumes and profitability were marginally lower in FY2016. The silo segment benefited from the increased in-house crop as it delivered growth in volume, retaining a robust profitability. Overall, our grain and infrastructure business EBITDA contribution was USD 107 million in FY2016, down 6% y-o-y. Our farming division demonstrated another year of stellar performance, which substantially offset the setback in the sunflower oil division. Our continued commitment to modern production technology, quality of inputs and productivity gains assures sustainable large-scale and low cost operations. As a result, our crop yields increased and reached record levels for major crops despite generally unsupportive weather. On the revenue side, the farming segment profited from the reinstatement of VAT refunds on grain exports, as domestic farm gate prices improved. On the cost side, the business benefited from currency devaluation as land lease, staff and transportation costs declined in dollar terms. Additionally, the low moisture content of harvested crops translated into notable savings in silo costs, thus reducing the overall cost of production. Record financial performance in the farming business was achieved during the period of prolonged weakness of international soft commodity prices. This is a good indicator of our global cost competitiveness in the prowww.kernel.ua Kernel Holding S.A. Annual and Accounts 30 June

7 Chairman s Statement Strategic duction of a wide range of grains and oilseeds. Overall, our farming business EBITDA contribution was at USD 146 million in FY2016, up 49% y-o-y. For the first time in Kernel s history, the farming business became the largest contributor to consolidated EBITDA, accounting for a share of nearly 40%. Overall, the operational targets which we set a year ago have been accomplished across each business line except for the underperformance of the sunflower oil business. Based on FY2016, the Board intends to recommend the shareholders to approve the dividend of USD 0.25 per share. As we are already in FY2017, I would like to outline a few major points for the new season. In the sunflower oil business, we are pleased to see Ukrainian farmers delivering a record sunflower seed harvest this autumn, which translates into at least million tons of incremental sunflower seed supplies on the market compared to the previous year. As one of the largest sunflower seed growers in Ukraine, we clearly see strong profitability of sunflower seed production in Ukraine compared to other major crops as the squeezed crushing margins translated into extra profits for farmers. In our view, this should remain a strong economic incentive to Ukrainian farmers in their effort to expand sunflower seed production, thus bringing the market forces of supply and demand into midterm equilibrium. Nevertheless, we do not expect a rebound in crushing margins in FY2017 as the additional capacity commissioned during the last season should absorb the incremental supply. Generally, we expect crushing margins to settle to levels seen a year ago while we expect to crush around 3.0 million tons of sunflower seed in FY2017, up from 2.7 million tons last season. In the grain and infrastructure business, we plan to export 5.6 million tons of grain and oilseeds to the international market. Our positive expectations stem from a record harvest expected in both Ukraine and Russia, a record production in our farming division. We expect nearly full utilization of our transshipment facilities with strong margins comparable to the previous year while silo in-take volumes and profitability are anticipated at similar levels year-on-year. In the farming division, we expect another outstanding year of operational performance. All crops are expected to deliver higher yields setting an industry standard for operational excellence; this is a goal which we set a few years ago when the farming division materially underperformed our local peers. This is a great result, considering that the weather conditions were not ideal, especially in the western part of Ukraine, leaving headroom for future productivity gains. In line with our hedging policies, a significant majority of the crop has been pre-sold. With this information at hand, we can reasonability estimate that the farming division should generate nearly the same level of EBITDA in FY2017 as we posted in FY2016. The strong performance of the past two financial years is the result of the strategy we adopted back in 2014 during the most difficult period for Ukraine. The primary objective was capital accumulation to strengthen the balance sheet to adjust and prepare our business for uncertainties and possible external shocks down the road. We gave up growth and development in exchange for a higher level of financial stability. We managed to streamline our asset base as we divested a number of idle or non-performing assets, thus unlocking substantial frozen capital on the balance sheet, reinforcing our cost leadership in the sector and improving returns. We also overhauled our farming division. The successful execution of the 2014 strategy is a clear testament of the flexibility and adaptability of our business model to market needs, proving the imbedded resilience to outside setbacks. I m proud of and thankful to my colleagues for the hard work needed to execute the plan, making Kernel ever better and stronger. In conclusion, I would like to discuss our midterm plan to develop and bring our business to a new sustainable level. Our strategic imperatives remain intact: financial stability and integrity. The primary goal of our strategy is to consolidate the oilseed crushing industry. We believe that the recent decline in crushing margins is a strong catalyst for industry consolidation. With a 23% market share in Ukraine, Kernel has a significant industry presence and is well-positioned to be a driver of this process. On the way to this goal, we acquired an oilseed crushing plant in the Kirovograd region of Ukraine in February 2016 with a crushing capacity of 560,000 tons of sunflower seed per year (the former Creative crushing facility). In the grain and infrastructure business line, we aim to double grain exports from the Black Sea region by Within the next few months, we plan to start the construction of our greenfield deep-water grain transshipment facility site in the port of Chornomorsk (former Illichevsk) in Ukraine, which is anticipated to be commissioned in This should enable us to remove bottlenecks in our transshipment capabilities and add 4 million tons per year of incremental capacity. The new facility is a key element of increasing the export volumes from the region and should contribute to growth in the export terminals and grain segments. Finally, we strive to achieve sustainable low-cost crop production. We launched our #DigitalAgri- Business project in 2016 with the aim to further strengthen our leading position in large-scale efficient crop production. The project also seeks to obtain higher productivity from our farming business line through the implementation of an intelligent IT crop production management system capable of integrating and analyzing big data and providing solutions for timely planning, execution and monitoring of field operations. We also plan to expand our farming business in Ukraine, assuring balanced development of each of the business lines. We are fully committed and motivated to execute our strategic plan. We have the right mix to succeed: a solid balance sheet, a leadership market position in each business line and a strong management team. Andriy Verevskyy Chairman of the board of directors Kernel Holding S.A. Annual and Accounts 30 June

8 Kernel at a Glance Chernihiv Kursk Voronezh Lutsk Sumy Belgorod Rivne Zhytomyr Kyiv Lviv Kharkiv Ternopil Khmelnytskyi Vinnytsia Cherkasy Poltava Ivano-Frankivsk Uzhhorod Kirovohrad Dnipropetrovsk Luhansk Chernivtsi Zaporizhia Donetsk Rostov na Donu Mykolaiv Odessa Kherson Crushing plants Ports Azov Sea Silos Key farming locations 50 km Black Sea Simferopol Taman Krasnodar Segment results summary Revenue, USD million EBITDA, USD million EBITDA margin Volumes, thousand tons FY2016 FY2015 y-o-y FY2016 FY2015 y-o-y FY2016 FY2015 FY2016 FY2015 y-o-y Sunflower oil Sunflower oil sold in bulk 1, ,099.7 (6.1%) (41.3%) 11.0% 17.5% ,030.2 (4.5%) Bottled sunflower oil (10.0%) (22.9%) 15.4% 18.0% (5.3%) Grain and infrastructure Grain ,053.3 (22.0%) (22.1%) 5.6% 5.6% 4, ,743.8 (7.0%) Export terminals % % 65.4% 66.6% 5, , % Silo services (9.9%) % 61.2% 43.2% 2, , % Farming Farming % % 40.8% 31.6% 1, , % Sugar and discontinued operations 3 (0.5) 25.8 n/m (57.6%) Unallocated corporate expenses (37.2) (32.9) Revenue reconciliation (421.1) (371.3) 13.4% Total 1, ,329.5 (14.6%) (12.7%) 17.4% 17.0% Note: Differences are possible due to rounding. 1 Million liters. 2 Including 1,619.7 thousand tons transshipped through Taman port in FY2016 and 1,173.8 thousand tons FY2015. Earnings from the joint venture are accounted for below EBITDA. 3 Discontinued operations from sugar and assets held for sale. Source: Kernel. Kernel Holding S.A. Annual and Accounts 30 June

9 Kernel at a Glance continued Strategic Sunflower oil Grain and infrastructure Farming What do we do? We produce 7% 1 of the world s sunflower oil and supply it to international markets across the world. Sunflower meal, a protein-rich component of animal fodder, and sunflower seed husk, a biofuel, are by-products of the process. What assets do we have? Our nine (incl. one in Kropyvnytskyi under a tolling agreement) oilseed crushing plants are located across sunflower seed belt in the Black Sea region and have a total capacity of 3.5 million tons. We also own three major brands under which we sell in the domestic market in Ukraine. What is this business contribution? Our sunflower oil business contributed EBIT- DA of USD million in FY2016, 34% of the total 2. What is the key risk of this business division? The sunflower seed harvest in Ukraine is the main determinant of the performance of our sunflower business. Sunflower seed has low density, which prohibits long-distance transportation, thus both import and export of unprocessed sunflower seed is immaterial. What makes us competitive? We operate the largest network of sunflower oil plants in the Black Sea region, which allows us to reduce fixed costs and makes us less prone to volatility in the harvest size within the proximity of each plant. Our policy of locking in our margin at the moment of sunflower seed procurement also reduces our risk profile. We provide grain drying, cleaning, and storage services at our silos, merchandise almost 4.5 million tons of grain and oilseed, and transship over 5.3 million tons of soft commodities through our deep-water ports located on the Black Sea. We own Ukraine s largest private network of inland silos with a capacity of 2.8 million tons, a deep-water grain terminal of 4.0 million tons in Ukraine and a 50% stake in a 4.0 million ton deep-water grain terminal in the Russian Federation. The grain and infrastructure business contributed EBITDA of USD million in FY2016, 28% of the total 2. Weather can affect the harvest size in Ukraine and the Russian Federation. A lower harvest will decrease utilization of our infrastructure and will result in lower export sales in our grain merchandising segment. Our unparalleled asset base of internal grain storage facilities and world-class deep-water ports allows us to be a largest grain exporter from the Black Sea region and achieve higher than average profitability. We lease 390,000 hectares of farmland in Ukraine and grow crops such as corn, soybean, sunflower seed and wheat % of our output is further processed or exported through our other segments. We operate state-of-the-art large-scale farming machinery produced by global leaders, have our own seed plant, and lease our farmland under long-term contracts that give us the right of first refusal for prolongation and land purchase once land trade moratorium is lifted. The farming segment contributed EBITDA of USD million in FY2016, 38% of the total 2. Global volatility in agricultural prices has the most significant effect on our crop production business, as we sell at international prices. Local weather could also affect production levels. The large scale of our business model allows us to achieve lower production costs. At the same time, our natural integration with other business segments allows us to earn profits across the whole value chain and weather low parts of the soft commodity price cycle. How many people work in this business division? 2,455 full-time employees. 3,250 full-time employees. 7,767 full-time employees. For more info on our sunflower oil business, see pages For more info on our grain and infrastructure business, see pages For more info on our farming business, see pages Based on USDA data for marketing year 2015/16. 2 Share of total EBITDA prior to head office costs which are unallocated between segments and net of discontinued operations from sugar and assets held for sale. Kernel Holding S.A. Annual and Accounts 30 June

10 Strategic Our Business Model MT (25%) MT (75%) Gr 94 million liters l Oi ain MT Sunflower oil 0.9 MT Sunflower meal 1 2 Own farming/third-party farmers We farm 390,000 hectares of farmland in Ukraine, producing a variety of crops, including corn (35% of acreage), sunflower seed and soybean (40% of acreage combined), as well as wheat and forage crops. Annually, our farms produce up to 1.8 million tons of grains and oilseeds that go through our other business divisions: this secures up to 30% of our total grain export and 6-9% of sunflower seed crush volumes. The remaining volumes are supplied by third-party farmers. 3 Procurement Our origination network is one of the largest and most efficient in the region: we annually procure in around 2.5 million tons of sunflower seeds and near 3 million tons of grains from about 5,000 farmers. Our daily contact with farmers and our reputation as a trustworthy counterparty ensures our position as the buyer of choice for small and large crop producers. 4 Silo storage We operate 2.8 million tons of grain silo storage capacity located across different regions of Ukraine. Silos provide grain drying, cleaning and storage services to our and third-party farmers. We view our silo network as a vital element of our captive origination platform MT of grains 5 Oilseed processing Our nine (incl. one in Kropyvnytskyi under a tolling agreement) oilseed crushing plants have a processing capacity of 3.5 million tons of sunflower seed per year. Processing one ton of sunflower seed yields an average of 440 kg of sunflower oil, 390 kg of sunflower meal, and 160 kg of husks. Approximately 80% of our sunflower oil production is exported to a variety of global markets, with India, China, the Middle East and the EU being primary destinations. Sunflower meal is exported mostly to the EU, where it is used as a protein component in livestock fodder. Husks are burnt to produce green energy. 6 Grain export Our export team sells up to 5 million tons of grains and oilseed annually, entering into forward sales contracts within the same time frame as our origination team buys grains and oilseed from farmers, thus locking in the margin at the moment of procurement. Approximately 80% of the grains are delivered to the Middle East, North Africa and the EU, while about 20% are exported to Eastern Asia and Sub-Saharan Africa. FY2016: EBITDA $346.4m 7 Bottled sunflower oil Approximately 10% of the gross bulk sunflower oil produced at our crushing plants is further refined, bottled and sold in Ukraine and abroad under three brands and private labels. Export markets account for more than half of our bottled oil sales. 8 Export terminals We operate two deepwater grain export terminals on the Black Sea with annual transshipment capacity of 6 million tons. One of the terminals is 50/50 owned through a joint venture. Kernel Holding S.A. Annual and Accounts 30 June

11 Our Strategy We aim to profitably double export volumes, providing unique complex solutions to our clients: customers and suppliers, by balanced development of our business segments as a result of efficient use of our asset base, investment in technology and innovation, strategic acquisitions, continuous development of our employees and strengthening of operations. Imperatives Strategic pillars Mid-term targets Ultimate goal stability / Strong balance sheet Geographic focus Consolidate the oilseed crushing industry Integrity Strong asset base Double grain exports from FY2016 levels Maximize shareholders value Professional team of leaders Operational discipline Achieve sustainable cost leadership in crop production Mid-term targets in detail: Sunflower oil To consolidate the oilseed crushing industry in the Black Sea region through acquisition of up to 1.5 million tons of additional crushing capacity in Ukraine. Grain and infrastructure To double our grain exports by 2019 through greenfield construction of a 4-million-ton deepwater transshipment facility in Ukraine and optimizing the silo network for expansion of our trading and farming operations. Farming To achieve sustainable low-cost crop production through investment in technology and acquisition of the leasehold rights for an additional 150 thousand ha of farmland in Ukraine. FY2016 strategy deliverables We increased our crushing capacity in FY2016 through acquisition of a state-of-the art 560,000-ton crushing facility in Kropivnitskiy and entered into tolling agreement for additional 260,000 tons of sunflower seeds. We streamlined our asset base by divesting 2 idle crushing plants located in Russia with installed capacity of 200,000 tons. In grain and infrastructure, we achieved a record 11% growth in volumes of grains transshipped in FY2016, as we debottlenecked our Transbulkterminal facility and increased the storage capacity at Taman. Our farming division has delivered another year of great profitability, substantially offsetting the drawbacks of our sunflower oil business. We launched a DigitalAgriBusiness project, with an objective to enhance our leadership position as large-scale sustainable and efficient crop producer. We fully exited from sugar business by divesting the remaining idle assets. Kernel Holding S.A. Annual and Accounts 30 June

12 Performance in FY2016 Strategic Revenues $1,988.5m -15% y-o-y EBITDA $346.4m -13% y-o-y Segment performance For sunflower oil, grain and infrastructure, and farming segment performance, see pages 16-20, and 26-30, respectively. Our integrated and complimentary business model delivered a record net profit in FY2016. The record earnings posted in the grain transshipment and farming segments offset the weak financial performance of the sunflower oil division caused by imbalances in supply and demand for oilseeds. FY2016 was a great year for the farming division. It substantially outperformed our most optimistic expectations. Grain and infrastructure were generally in line both in volumes and margins with our initial views while the sunflower oil segment delivered a mixed performance as a result of structural changes in domestic oilseed demand. Our crushing business, generally in line with our initial pessimistic views, experienced a marketwide margin contraction, decreasing to 11% from 18% a year ago, stemming from imbalances in supply and demand of sunflower seeds and farmers unwillingness to sell actively the oilseed stock. The market experienced demand shock as two new crushing plants were commissioned and a few previously dormant plants were returned to operation in FY2016. As a result, demand for sunflower seeds rose an estimated 2.5 million tons while supply only marginally increased y-o-y. The declining profitability of crushers fueled the profitability of sunflower seed growers, being a natural economic incentive for farmers to increase plantings under the oil-bearing crop. This should eventually reverse of the negative crushing sector cycle once the sunflower seed supply gap narrows. Crushing volumes rose 6% y-o-y while the crushing margin was under pressure in FY2016. The grain and infrastructure business handled a record 5.3 million tons of grains, up 11% from a year ago. That was a result of the de-bottlenecking of our Transbulk and Taman deepwater terminals on the Black Sea. However, our grain sales volumes fell 7% y-o-y which, combined with lower demand for inland silo drying services, caused by unusually dry weather, made the overall contribution from grain and infrastructure comparable to the previous year. In FY2016, our farming division contributed 38% of the Group EBITDA, thus having another year of stellar performance, as we continued to implement changes of our production technology to deliver growth in crop yields. For the second consecutive year, our crop production costs per hectare continue to decline as energy costs and the Ukrainian hryvnia depreciated further. Additionally, reinstatement of VAT refunds on grain exports increased farm gate prices. FY2017 outlook: we aim to increase utilization of our crushing capacities, as we anticipate the narrowing of the market-wide imbalance between demand and supply of oilseeds stemming from a record sunflower seed harvest of 13.5 million tons, up 16% from the previous year. Grain and infrastructure volumes are expected to increase in line with gross production in Ukraine, thus delivering comparable profitability. Our farming business s earnings contributions should remain similar to the previous year s, with a slight increase in production costs, caused by inflation of the Ukrainian hryvnia driven expenses. Kernel Holding S.A. Annual and Accounts 30 June

13 Performance in FY2016 continued Strategic Income statement highlights Our EBITDA for the year ended 30 June 2016 amounted to USD million, a 13% y-o-y decline, as a result of mixed earnings from our grain and infrastructure, record profits in our farming, and challenging performance in our sunflower oil division. In FY2016, the Ukrainian crushing business experienced an EBITDA margin contraction, driven by two major factors: increased crushing capacity and farmers unwillingness to sell oilseed stock. The former resulted in higher demand for sunflower seeds escalating competition for the oil-bearing crop, while the latter caused a weak supply of sunflower seed from October to January, which led to a margin squeeze through higher procurement prices during that period. Therefore, the EBITDA contribution by our sunflower oil division fell 40% y-o-y, to USD million. At the same time, our crushing volumes in FY2016 have reached a new record 2.7 million tons of sunflower seed, up 6% y-o-y. Grain and infrastructure EBITDA stood at USD million, down 6% y-o-y. Our grain exports EBITDA margin stood firm at 6% in FY2016, amounting to USD 46.3 million, down 22% y-oy as a result of slower selling activity by farmers from October to January and weaker profitability in the Russian Federation. Kernel s EBITDA split (USD million) (29) (34) Farming and sugar Grain and infrastructure (44) (37) Note: Differences are possible due to rounding. Source: Kernel Hereinafter, segment EBITDA is presented prior to certain unallocated G&A costs (33) (37) FY2012 FY2013 FY2014 FY2015 FY2016 Sunflower oil Unallocated G&A Key market highlights: Material contraction of crushing margins stemming from imbalance in supply and demand of sunflower seeds as new crushing plants were commissioned during the season. Both Ukraine and the Russian Federation had a record year of grain exports: Ukraine delivered 42 million tons of grain and oilseeds, up 2 million tons y-o-y, while the Russian Federation sold 35 million tons to international markets. The continued prevalence of grain production over consumption kept international soft commodity prices under pressure. Income statement highlights USD million FY2016 FY2015 y-o-y Revenue 1, ,329.5 (14.6%) Net IAS 41 gain/(loss) 20.1 (6.8) n/m Cost of sales (1,548.5) (1,805.6) (14.2%) Gross profit (11.0%) Other operating income (45.9%) Distribution costs (158.3) (197.1) (19.7%) G&A expenses (59.3) (66.9) (11.4%) Operating profit (14.4%) Finance costs, net (57.1) (64.8) (11.9%) Foreign exchange gain/(loss) 30.4 (143.4) n/m Other expenses (16.6) (9.6) 1.7x Share of gain in joint venture (23.6%) Profit/(Loss) before income tax % Income tax expenses (3.9) (1.2) 3.4x Loss from discontinued operations (17.0) (26.2) (34.9%) Net profit/(loss) attributable to equity holders of Kernel Holding S.A x Non-controlling interest 1.7 (11.4) n/m EBITDA (12.7%) Source: Kernel. Export terminals posted a record transshipment volume of 5.3 million tons, while the EBITDA contribution was USD 37.5 million, virtually unchanged from a year ago, as some of the decline in transshipment fees was compensated by a decrease in fixed costs and administrative expenses caused by the depreciation of the Ukrainian hryvnia. The silo services EBITDA increased 28% to USD 23.4 million in FY2016, as costs deflated, driven by lower natural gas prices and the devaluation of the national currency. Farming continued to set records with an EBIT- DA contribution up 49% to USD million, as the result of further efficiencies in crop cultivation, technology advancements and lower production costs caused by the Ukrainian hryvnia s depreciation, which boosted profitability. Additionally, reinstatement of VAT refunds on grain exports increased farm gate prices. For a detailed explanation of operating and financial performance of sunflower oil operations, please refer to pages of the report, for grain and infrastructure pages 21-25, and for farming pages Kernel Holding S.A. Annual and Accounts 30 June

14 Performance in FY2016 continued Strategic Revenues Our revenues stood at USD 1,988.5 million in FY2016, down 15%, primarily as a result of lower global prices for agricultural commodities, which were reflected in our revenues and cost of purchased commodities, and of a decline of volumes of grain and sunflower oil sold, as we shifted some sales to Q1 FY2017. IAS 41 effect The net change in the fair value of biological assets and agricultural produce amounted to positive USD 20.1 million in FY2016 compared to negative USD 6.8 million in FY2015. This component included a positive gain from revaluing crops in fields to fair value less costs to sell as of 30 June 2016 and expensing of the respective gain booked a year earlier, as well as a change in the fair value of live animals. The positive amount of FY2016 reflects anticipation of larger y-o-y harvest. Gross profit Gross profit came to USD million in FY2016, down 11% from USD million a year ago.the decline of gross profit is primarily attributable to the lower contribution of sunflower oil division as the mismatch in the supply and demand of sunflower seeds resulted substantial reduction of crushing margins as well as to the mixed performance of our grain segment. Other operating income Our other operating income amounted to USD 44.6 million in FY2016 compared to USD 82.4 million a year earlier. Most of the income (USD 23.4 million in FY2016 vs. USD 10.7 million in FY2015) was attributable to VAT benefits for our farming companies which were entitled to retain the difference between input VAT paid on items purchased (or crops grown) and VAT charged on products sold up to 1 January Other operating income also included USD 9.1 million of gains on our futures contracts (related to hedging of our farming harvest) and a gain of USD 5.6 million on operations in US dollars reflecting the decrease in differences between the market and official exchange rates for US dollars in Ukraine. For a detailed breakdown, please refer to Note 26 to the financial statements on page 104. Distribution costs Distribution costs have decreased in FY2016 to USD million, down 20% y-o-y. This significant decline was fueled by two major reasons: further depreciation of the Ukrainian hryvnia against hard currencies (by 15% y-o-y), thus reducing the US value of our railway tariffs, and different delivery terms. As a result, our distribution cost came at 8% of revenues in FY2016, flat y-o-y. General and administrative expenses General and administrative expenses totaled to USD 59.3 million in FY2016, an 11% decline from USD 66.9 million a year ago, driven by our constant focus on cost control and a further 15% y-o-y depreciation of the Ukrainian hryvnia. As a percentage of revenues, G&A stood at 3%, flat y-o-y. Operating profit As a result of the above-mentioned changes in the segments EBITDA and a USD 7.7 million y-o-y decrease in depreciation and amortization caused by the depreciation of the Ukrainian hryvnia, profit from operations was USD million, down 14% from USD million a year ago. Despite the decline in absolute terms, the operating margin remained stable at 14%. Finance costs As a result of deleveraging our business, the finance cost for the FY2016 declined by 11% y- o-y to USD 57.1 million. Foreign exchange gain The net foreign exchange gain stood at USD 30.4 million in FY2016, compared to a loss of USD million a year ago, mostly reflected in a non-cash gain recognized after the revaluation of our intragroup balances denominated in Ukrainian hryvnia. All of the Group s subsidiaries use the US dollar as their functional currency, except for farming, export terminals and silo services which use the Ukrainian hryvnia and the Russian ruble. As a normal course of business, the Group s subsidiaries may issue intercompany financing which, when revalued, causes either foreign exchange gains or losses at one of the Group s enterprises, if they had different functional currencies. Therefore, major portion of foreign exchange gain in FY2016, resulted from revaluation intercompany balances amounting to USD 40.6 million versus a loss of USD 43.0 million, offset by revaluation of prepaid taxes balances stemming to forex loss of USD 20.0 million in FY2016 and USD 78.2 million in previous year. Other expenses Other expenses stood at USD 16.6 million in FY2016, a 1.7x increase versus USD 9.6 million a year ago caused by a USD 6.6 million of an one time revaluation loss of our fixed assets and impairment of our trademarks and goodwill of USD 3.6 million, as well as a loss on the disposal of subsidiaries of USD 3.6 million which were divested in FY2016. Income tax Income tax expenses amounted to USD 3.9 million in FY2016, a 3.4x increase from USD 1.2 million a year ago as we utilized tax deductible forex losses caused by an earlier devaluation of the Ukrainian currency. Net profit As a result, net profit attributable to the shareholders of Kernel Holdings S.A. almost doubled in FY2016 to USD million from USD million a year ago. Dividends In accordance to our dividend policy, we paid the dividend of USD 0.25 per share on 29 April 2016 for FY2015. Furthermore, the board of directors recommends the general meeting of shareholders to approve the dividend of USD 0.25 per share for FY2016 to be paid during the financial year ending 30 June Kernel Holding S.A. Annual and Accounts 30 June

15 Performance in FY2016 continued Strategic Cash flow highlights Net cash provided by operating activities Operating profit before working capital changes was USD million in FY2016, relatively unchanged, in comparison to USD a year earlier. During FY2016, our changes in working capital stood at negative USD million, versus positive USD million a year ago, stemming from a combination of abnormally low inventories at the end of FY2015, a higher amount of grains procured by the Group, and a higher bulk oil stock as at 30 June 2016, accumulated to fulfill the contracts in Q1 FY2017. After accounting for financial expenses and income taxes paid, which together stood at USD 60.4 million, down 26% y-o-y, net cash provided by operating activities reached USD million in FY2016, down from USD million in the previous year, stemming from negative working capital adjustment as discussed above. Net cash used in investing activities Net cash used in investing activities stood at USD 60.7 million in FY2016, up 1.1x from its maintenance level of USD 24.3 million a year ago, as a result of acquisitions and divestments completed during the year ended 30 June 2016: In March 2016, we acquired a 100% share in a world class 560,000-ton multi-seed crushing facility in Kropyvnytskyi (formerly Kirovohrad). As of 30 June 2016, the consideration paid comprised USD 50 million and the amount due and payable was USD 25 million calculated as the present value of amounts payable in arrears within the next five years (refer to Note 7 of the ). In April 2016, the Group disposed of two of its oilseed crushing plants in the Russian Federation with total crushing capacity of 200,000 tons of sunflower seed per year, for cash consideration of USD 12 million. During the year ended 30 June 2016, the Group disposed of two of its grain silos, located in Mykolaiv and Zaporizhzhya, as well as a small farming entity, with no material leasehold farmland as of the date of disposal, for a cash consideration of USD 2 million. Credit metric highlights The table below presents total outstanding short-term and long-term interest-bearing debt as of 30 June 2015 and 30 June Our net debt decreased to USD million as of 30 June 2016 versus USD million a year ago, as the Group continued to use operating cash flow to strengthen its balance sheet additionally, more than 60% of our net debt position as of 30 June 2016 was covered by readily marketable inventories such as corn, wheat, sunflower oil and other products that could easily be converted into cash due to their commodity characteristics and widely available markets and international pricing mechanism. As of 30 June 2016, the net debt to EBITDA ratio stood firm at 0.8x. Sources and uses of cash (USD million) Cash generated from operations Disposals Sources Uses Sources Uses Sources Uses Finance cost and income tax Maintenance CAPEX Acquisitions Repayment of debt Dividends Note: Organic and maintenance capital expenditure excludes acquisitions and disposals. Note: Differences are possible due to rounding. Source: Kernel Liquidity position and credit metrics 194 FY2014 FY2015 FY Company s debt vs. working capital (USD million) Liabilities Current Assets Liabilities Short-term interest bearing debt Long-term interest-bearing debt 39 Current Assets Liabilities Current Assets FY2014 FY2015 FY2016 Cash & cash equivalents Readily marketable inventories Biological assets at cost VAT and income tax prepaid Net other working capital Notes: Readily marketable inventories are agricultural inventories such as corn, wheat, barley, soybean, sunflower seed, meal and oil, among others, which are readily convertible into cash because of their commodity characteristics, widely available markets and international pricing mechanism, carried at cost. Farming work-in-progress represents crop production expenses incurred prior to 30 June. All crops are expected to be harvested within one to four months. Net other working capital is the sum of trade accounts receivable, prepayments to suppliers and other current assets, other inventories minus trade accounts payable minus advances from customers and other current liabilities. Source: Kernel. USD million except ratios FY2016 FY2015 y-o-y Gross interest-bearing debt (26.6%) Cash (53.2%) Net interest-bearing debt (16.5%) Readily marketable inventories % Adjusted net financial debt (50.3%) Shareholders equity % Net debt / EBITDA 0.8x 0.9x Adjusted net debt / EBITDA 0.3x 0.5x EBITDA / Interest 6.1x 5.8x Source: Kernel. Kernel Holding S.A. Annual and Accounts 30 June

16 Sunflower Oil Strategic Revenues $1,134.7m -7% y-o-y EBITDA (before head office expenses allocation) $128.8m -40% y-o-y Our strong asset base and leadership position have helped us successfully navigate in a challenging environment. Our business model Kernel continued to hold onto its leadership position, selling over 1 million tons of sunflower oil and maintaining its 7% market share globally. Moreover, as a stand-alone sunflower seed processor, we account for over 14% of global produce in sunflower oil in 2015/16, crushing 2.7 million tons of sunflower seeds originated in Ukraine, a 10% increase y-o-y. Our margin-driven business model eliminates price volatility risk as we effectively lock-in the margins at the moment of raw material procurement. We buy sunflower seed from farmers and sell the corresponding volumes of sunflower oil and meal through forward contracts in a similar time frame. Therefore, the volatility of the crushing margin is a function of supply and demand for sunflower seeds in a particular season rather than a function of the price volatility in global edible oils marketplace. With ever-growing demand, the success of our business is based on scale, operating efficiency and prudent risk management. The sunflower oil division s EBITDA amounted to USD million FY2016, down 40% y-oy. Despite a decrease in profitability, associated with farmers unwillingness to sell their crops and intensified competition in FY2016 for raw materials, we continued to widen our origination network, increased crushing capacities and achieved solid utilization. In March 2016, we completed an acquisition of a modern 560,000-ton multi-seed crushing facility in Kropyvnytskyi (formerly Kirovograd) fitting perfectly into our existing origination and marketing platform, which was operational under a tolling agreement and, in combination with the standing asset base, has helped us achieve a record level of sunflower seeds crushed. Our retail bottled oil segment sales of sunflower oil, following the overall segment trend, experienced a margin squeeze, resulting in USD 15.8 million EBITDA in FY2016, down 23% y-o-y. FY2017 outlook and strategy Being the most profitable crop, in FY2017 Ukrainian farmers increased sunflower sowing acreage by 15% y-o-y. Therefore, in combination with favorable weather conditions during the pollination and ripening periods, a record harvest of around 13 million tons of sunflower seeds is expected. In preparation for the upcoming marketing year, our Black Sea Industries, a crushing plant located in Chornomorsk (formerly Illichevsk), underwent improvements in its storage and pre-crush facilities, which together with the renegotiated tolling agreement, adding approximately 275,000 tons of crushing capacities, raised the total installed capacity to a record 3.5 million tons of sunflower seeds, up 30% y-o-y. Kernel Holding S.A. Annual and Accounts 30 June

17 Sunflower Oil continued Strategic Our markets Global edible oils market trends The world s production of edible oils has been faltering over the past two years, achieving slightly over 1% y-o-y growth in 2015/16, far below the average 15-year growth rate of 5% (1). El Niño, being the one of the primary reasons for the tighter supply of edible oils in 2015/16, slowed the decline in prices as well as narrowed the volatility to the Black Sea s FOB of USD per ton. The combination of a record decline in ending stocks, higher domestic consumption and El Niño-caused supply shock led to the flattening of global exports of edible oils, with a mere 1% y-o-y increase. Key trends: In FY2016, the competitive landscape for sunflower seed intensified, driven largely by recent increases in new crushing capacities undermining profitability of crushers and fueling the profitability of farmers. Farmers unwillingness to sell their new harvest due to various reasons but mainly because of volatility of the currency market and intensified competition for sunflower seeds led to a shift in bargaining power and subsequently squeezed crushing margins in FY2016. Global consumption of vegetable oil (million tons) 1995/ / / / /16 Palm Soybean Rapeseed Sunflower seed Other Note: Differences are possible due to rounding. Source: USDA, September However, Ukraine has remained the largest sunflower exporter in the world, with its share of international exports standing at 55% in 2015/16, followed by the Russian Federation and Argentina, based on USDA data. Sunflower seed processing in Ukraine Being an export-oriented business, sunflower seed prices tend to correlate with international edible oil prices. In 2014/2015, the sunflower seed harvest, harmed by a severe drought in the central and southern regions, amounted to 10.1 million tons, versus 11.2 million tons in 2015/16, with virtually unchanged sowing acreage and favorable weather conditions, stemming primarily from a recovery of yields to their average levels year period from 2000/ /16 61 Global sunflower exports (million tons) Ukraine Russia Turkey Argentina Other / / / / /17E Note: Differences are possible due to rounding. Source: USDA, September % of the sunflower seed harvest was crushed domestically to produce 4.7 million tons of sunflower oil in 2015/16, of which 4.2 million tons were exported. While the supply of sunflower seed recovered to a normalized level in 2015/16, the crushing capacities in Ukraine were underutilized. During the year, several oilseed crushing plants were commissioned, bringing the overall sunflower seed processing capacity in Ukraine to around 15 million tons. As a result, the Ukrainian crushing business has experienced an EBITDA margin contraction in 2015/16, driven by two major factors: higher crushing capacities and farmers unwillingness to sell their sunflower seed stock. Sunflower seed harvest in Ukraine (million tons) / / / / /16 Source: State Statistics Service of Ukraine. The former resulted in an higher demand for sunflower seeds, escalating competition, while the latter caused an undersupply of sunflower seed in October through January, which led to a margin squeeze due to higher procurement prices during those months. Basically, the combination of mismatch in supply and demand for sunflower seeds, anticipation of further devaluation of the national currency, and dry weather conditions have shifted the bargaining power into the hands of Ukrainian farmers in 2016/15, resulting in a notable contraction of the crushing margin. Outlook Boosted profitability of sunflower seed production translated into a strong driver to reverse the cycle, incentivizing farmers to increase production of the oilseed. In 2016/17, Ukrainian farmers planted a record high acreage under sunflower seeds (up 15% y-o-y), which is expected to yield a record sunflower seed harvest of around 13 million tons. Kernel Holding S.A. Annual and Accounts 30 June

18 Sunflower Oil continued Our business model Market leader in oilseed crushing We operate our nine plants (including one in Kropyvnytskyi under a tolling agreement) to yield a total annual crushing capacity of 3.5 million tons of sunflower seed, making Kernel the largest oilseed crusher in the Black Sea region. In April 2016, we divested two Russian crushing facilities and acquired a new one in Ukraine. With our plants in Ukraine located across the sunflower seed belt in proximity to sunflower seed production, Kernel benefits from scale, improving cost leadership and healthy utilization. Sunflower seed industrial crushing capacity in Ukraine (million tons) 42% 15 3% 3% 5% 3% 6% 24% 7% 7% Prudent risk management Our business is margin-driven: we sell sunflower oil and meal through forward contracts in a similar timeframe as we buy sunflower seed from farmers, essentially locking in the margin at the time of procurement. Our origination team purchases sunflower seed from farmers in close proximity of plants, either at the farm gate or at the wide network of our silos. At the same time, our international sales team enters into forward contracts to sell sunflower oil, thus fixing volumes and prices. Sunflower oil sold in bulk exports by destination (thousand tons) 14% 2% 19% 10% % 28% As a result, our balanced book policy is essential to minimize the impact of the high volatility of international commodity prices. We mitigate counterparty risks by selling to the first-class global traders under strictly monitored limits or only either against letters of credit or bank guarantees provided by top international banks or to the short-number of world-class global traders. Exports, as a dominant sales component Typically, 90-93% of our sunflower oil production is exported in bulk to the international market while the remainder is refined, bottled and sold in Ukraine. Our major markets for sunflower oil include India, China, the Middle East and North Africa. Approximately 80% of our sunflower oil is exported to emerging market nations, the population of which, according to the World Bank, are expected to grow by 10% over the next ten years. More than 90 thousand liters of sunflower oil is bottled in Ukraine and sold under our well-recognized brands and private labels, covering all price segments, both domestically and internationally. Our leadership position allows us to target the premium segment. Moreover, during FY2016 our bottled segment saw record export sales, accounting for 51% of total bottled oil sales. Kernel Vioil Bunge MHP Privat Cargill Noble Wilmar Other India EU China Middle East Africa Asia Other Note: Differences are possible due to rounding. Source: Kernel. Source: Kernel. Sunflower seed crushing products Sunflower oil An edible oil rich with Omega-3 and Omega-6 acids. A traditional vegetable oil of choice for many regions of the world, sunflower oil is used only for culinary purpose, primarily for salad dressing and frying. One ton of sunflower seed yields approximately 44% of sunflower oil. Sunflower meal A by-product of crushing process, sunflower meal is a protein-rich livestock feed. Used for compound feed production for hog, cattle and poultry industries across the world, it is the third most important meal globally after soybean and rapeseed. One ton of sunflower seed yields approximately 39% of sunflower meal. Sunflower husk Before processing, sunflower seeds are dehulled. These husks are burned at boilers on site at our crushing plants to produce steam and in some sites also electricity. Excessive quantities of husk are pelletized and sold to co-generation power plants. One ton of sunflower seed yields approximately 16% of sunflower husk. Kernel Holding S.A. Annual and Accounts 30 June

19 Sunflower Oil continued Strategic performance Our sunflower oil operations are reported under two segments: sunflower oil sold in bulk and bottled sunflower oil. Sunflower oil business EBITDA (USD million) FY2012 FY2013 FY2014 FY2015 FY2016 Bottled sunflower oil Sunflower oil sold in bulk Source: Kernel Overall EBITDA contributed by the sunflower oil segments reached USD million in FY2016, down 40% y-o-y, mostly due to increased demand for sunflower seeds as a result of higher crushing capacity combined with the reduced pace of sunflower seed sales by farmers. Sunflower oil sold in bulk Revenues from the bulk sales segment amounted to USD 1,032.1 million, down 6% y-o-y in FY2016, primarily arising from a similar decrease in volumes sold. The segment s EBITDA stood at USD million, down 41% y-o-y. Two major factors drove the EBITDA down in FY2016: higher crushing capacity in the market and farmers unwillingness to sell their crops, lowering sunflower seed supply in October to January, which pressured margins through higher procurement prices during that period. Bottled sunflower oil Bottled sunflower oil sales were down 10% y-oy to USD million, as a result of decreasing sales volumes, caused by the deterioration of purchasing power in Ukraine due to the depreciation of the Ukrainian hryvnia over the past two years and our cautious approach to counterparty risk. We shifted volumes from the domestic to export market with no currency and limited counterparty risk. Along with lower bulk oil profitability, the bottled oil segment s EBITDA margin decreased to USD per thousand liters versus USD a year ago. Sunflower oil business performance Sunflower oil sold in bulk FY2016 FY2015 y-o-y Revenue USD million 1, ,099.7 (6.1%) EBITDA USD million (41.3%) Volumes sold thousand tons ,030.2 (4.5%) Revenue per ton USD/ton 1, ,067.4 (1.7%) EBITDA per ton USD/ton (38.6%) EBITDA margin % 10.9% 17.5% (6.6pp) Bottled sunflower oil FY2016 FY2015 y-o-y Revenue USD million (10.0%) EBITDA USD million (22.8%) Volumes sold million liters (5.3%) Revenue per thousand liters USD/thousand liters 1, ,153.1 (5.0%) EBITDA per thousand liters USD/thousand liters (18.6%) EBITDA margin % 15.4% 18.0% (2.6pp) Sunflower oil total EBITDA USD million (39.1%) Source: Kernel. Sunflower seed crushing volumes (thousand tons) Q4 (ends 30 Jun) Q3 (ends 31 Mar) Q2 (ends 31 Dec) Q1 (ends 30 Sep) FY2012 FY2013 FY2014 FY2015 FY2016 Source: Kernel. Despite the above-mentioned circumstances, we managed to retain the EBITDA margin during the periods of intensified competition, thus posting a material premium over the bulk oil segment s EBITDA of 11% during FY2016. M&A update In March 2016, Kernel finalized the acquisition of an oilseed crushing plant through an assignment of rights under agreement with a Ukrainian bank. As of 30 June 2016, the consideration paid comprised USD 50 million and the amount due and payable was USD 25 million calculated as the present value of amounts payable in arrears within the next five years (refer to Note 7 of ). Commissioned in 2012, the world-class multiseed facility has an installed crushing capacity of 560,000 tons of sunflower seed per year. The production plant, where Kernel has been operating under a tolling agreement throughout the year, is located in the Kirovograd region of Ukraine and fits well into Kernel s existing origination and marketing platform. In April 2016, Kernel divested the two least efficient oilseed crushing plants located in southern Russia for RUB 800 million, paid in cash by the buyer. The plants had a total crushing capacity of 200,000 tons of sunflower seed per year. FY2017 outlook Our outlook is cautiously optimistic for FY2017. First, Ukrainian farmers have increased acreage by 15% versus the previous year, driven by the record high profitability of growing sunflower seed because of the sizable gap in supply and demand fundamentals. Favorable weather conditions during the pollination and ripening periods have brought expectations of a record sunflower seed harvest of around 13 million tons. Second, our crushing capacities increased by 30% y-o-y as a result of the acquisition of an oilseed crushing facility in FY2016 and the expansion at our Black Sea Industries crushing plant along with the signed tolling agreement. Thus, we expect our oilseed crushing volumes to reach 2.9 million tons in FY2017 compared to 2.7 million tons in FY Kernel Holding S.A. Annual and Accounts 30 June

20 Sunflower Oil continued Non-financial performance Health and safety There were no life-altering accidents at our sunflower oil production in FY2016. During the year ended 30 June 2016, there were two work-related injuries at our sunflower oil plants in general, comparable to the previous year. Each production facility has a dedicated health and safety specialist who ensures that workplaces comply with safety requirements; all workers are equipped with coveralls and receive proper health and safety training. For more details on our health and safety performance, please refer to page 41 of this report. Employee training and development During the financial year ended 30 June 2016, we extended our sunflower oil management training program for key specialists at our oil crushing plants. A dozen managers were selected to go through this MBA Challenger module-based education program aimed to develop general business skills and competencies. With a total of 112 hours of formal learning spent in FY2016, excl. additional time for supplementing activities and diploma project, this educational program is designed to resemble executive business administration courses, adjusted for local specific needs. Product safety All of our sunflower oil products produced in FY2016 were produced at facilities certified at ISO standards, which integrates the principles of the Hazard Analysis and Critical Control Point (HACCP) system and application procedures developed by the Codex Alimentarius Commission. In addition, bottling facilities are certified under FSSC standard, and all production plants are certified under ISO We also ensure control over the food safety along the protein meal production and distribution value chain: production facilities are certified under GMP+B1, our truck company is certified under GMP+B4, transshipment and freight chartering is certified under GMP+B3. For more details on our health and safety, employee training and development, energy consumption and other sustainability performance and approach, please refer to pages of this report. Sunflower oil business energy consumption and energy intensity ratio Our graduate recruitment program, initially focused at the farming business division, has also been expanded to the sunflower oil business in FY2016. See more details on page 39. 3,887 3,512 3,550 3,690 3,109 Energy consumption and emissions intensity In FY2016, our energy consumed per ton of sunflower seed crush continues to decrease, as we managed to increase fuel burning efficiency at boilers installed at our production plants. At the same time, total energy consumption decreased as we divested two of our plants in the Russian Federation. During the year, we also benchmarked fuel efficiency at several our plants with global practice, revealing that our steam and electricity consumption is in line with the low end of the international range. 1,594 1,536 1,525 1,463 1,408 FY2012 FY2013 FY2014 FY2015 FY2016 Total energy consumption, thousand GJ Energy spent per ton of sunflower seed crushed, MJ Source: Kernel. All but one of our oilseed crushing plants use sunflower seed husk, a waste by-product of processing, as a key energy source to produce the steam required for production. Kernel Holding S.A. Annual and Accounts 30 June

21 Grain and Infrastructure Strategic In FY2016, our infrastructure set new records, being a vital element of our captive origination platform supporting our export volumes Revenues $ 917.2m -20% y-o-y EBITDA (before head office expenses allocation) $107.1m -6% y-o-y Our business model Ultimately, our grain and infrastructure segment successfully connects Ukrainian and Russian farmers with global markets. Kernel operates a highly sophisticated grain export supply chain. Our 2.8-million-ton silo service network provides essential grain drying, cleaning and storage to third-party farmers and to our own farming division. Vertical integration of our grain segment supply chains provides a long-term competitive advantage as it secures captive origination and levels earnings volatility. Therefore, our grain and infrastructure segment handles export operations, starting from buying grain from farmers at the farm gate or inland silos, providing transportation and selling these grains through forward contracts to the international markets via our two deepwater grain export terminals on the Black Sea with a total capacity of 6 million tons per year. Like our sunflower oil business, grain and infrastructure is a margin-driven business where profitability is determined by the physical supply of grains in the domestic market and efficient infrastructure rather than by global prices. FY2016 performance Grain sales volumes stood at 4.4 million tons, down 7% y-o-y, due to the change in seasonality of grain exports from Ukraine and the accumulation of pre-sold stock to meet stronger demand for deliveries in Q1 FY2017. Weaker grain trading margins of the first half of the season were offset with expanded margins in the second half following the reinstatement of VAT refunds on grain exports on 1 January Export terminals performance continued to set records, transshipping 5.3 million tons in FY2016, a healthy 11% y-o-y increase, largely attributable to the de-bottlenecking of our Chornomorsk (formerly Illichevsk) facility and capacity expansion at Taman, our joint venture deepwater grain transshipment terminal in Russia. The overall contribution to consolidated EBITDA of the segment was USD 37.5 million, up 2% y-o-y. The silo services segment s performance prospered in FY2016, delivering 2.8 million tons of cumulative grain and oilseed intake at inland silos a strong 12% y-o-y increase, caused by improving turnover of our storage facilities and streamlining the customer base. At the same time, revenues reached USD 38.2 million, down 10% y-o-y, as drier weather conditions during harvesting resulted in a 10% y-o-y decline in the volume of drying services provided. Overall, the segment s EBITDA contribution surged 28% y-o-y, reaching USD 23.4 million in FY2016, stemmed from the deflation of costs, attributable to lower natural gas prices and the devaluation of the Ukrainian hryvnya. FY2017 outlook and strategy In FY2017, grain exports are expected to be comparable to the previous year at 38 million tons in Ukraine and 37 million tons in Russia. We aim to grow export volumes from the region from increased in-house grain production along with the expanded capacities of our deepwater transshipment facilities. Silo services are expected to remain at the similar levels of intake. Kernel Holding S.A. Annual and Accounts 30 June

22 Grain and Infrastructure continued Strategic Our markets Ukraine s grain production and exports in 2015/2016 Ukraine reached a sustainable level of grain production above the 60-million-ton mark with a forecasted 6% increase in 2016/17 owing to favorable weather conditions and continuous improvement of applied farming technologies. Combined with a decrease in domestic consumption, Ukraine reached a record level of exported grains 38 million tons in 2015/16, up 7% y-o-y. Wheat exports surged by 50% in 2015/16 to 17 million tons. Corn exports fell to 16 million tons in 2015/16, down 20% y-o-y as a result of weaker domestic production. Barley export supplies remained steady at 4.4 million tons in the 2015/16 marketing year. Solid domestic grain production combined with record export volumes kept our infrastructure busy achieving nearly full capacity utilization ratios. Russian grain production and exports in 2015/2016 Overall, the grain harvest in the Russian Federation has remained relatively unchanged at 100 million tons, with wheat being a dominant crop accounting for almost 90% of gross output. A notable increase in carry-over stocks at the beginning of 2015/16, combined with flattening domestic consumption, resulted in an increase that boosted Russian exports by 10% y-o-y. Market outlook The 2016/17 forecast for the total grain harvest in Ukraine is 64 million tons, as of the date of this report s publication, which should result in record exports of grains around 38 million tons. In the Russian Federation, the 2016/17 season s harvest is estimated to reach a record level of 108 million tons, up 9% y-o-y, which should translate into approximately 37 million tons of grain exports. Kernel intends to maintain its market share. Grain and oilseed production in Ukraine (million tons) Key market trends: Both Ukraine and the Russian Federation produced and exported healthy grain and oilseed volumes to international markets, keeping our infrastructure at nearly full capacity utilization. Strong outlook for grain production in the Black Sea region in FY / / / / /17 F Oilseeds Grains Source: State Statistics Service of Ukraine, APK-Inform forecasts. September Ukraine s grain and oilseed exports (million tons) Oilseeds Grains Source: APK-Inform forecasts. September / / / / /17 F Grain and oilseed production in Russia (million tons) Oilseeds Grains Source: Russian Federation Federal State Statistics Service, APK-Inform forecasts. September Russia s grain and oilseed exports, by crop (million tons) Other (incl. oilseeds) Corn Barley Wheat Source: APK-Inform forecasts. September / / / / /17 F / / / / /17 F Note: Differences are possible due to rounding. Kernel Holding S.A. Annual and Accounts 30 June

23 Grain and Infrastructure continued Our business model Our grain and infrastructure business comprises three segments: silo services, grain marketing and export terminals. All are interdependent and serve a supply chain connecting Ukrainian and Russian farmers with international markets. Silo services Our inland silo network has 2.8 million tons of grain storage capacity, located across the key grain production regions in Ukraine. These silos provide grain drying, cleaning and storage services for both our own farms and third party farmers nationwide. In addition to typical services provided, our silo network serves as a crucial origination tool, enabling our procurement team to purchase grains and sunflower seed from farmers within a 100 km range from the harvested land, thus being the first buyer to consider. Grain storage capacities remain a bottleneck in Ukraine, considering the 1.5x increase in grain production over the last decade, while the construction of new silos is lagging due to capital intensity. Therefore, our silo services segment boasts a sustainable EBITDA margin with significant barriers to entry. Moreover, our inland silo footprint enables us to maintain close contacts with third-party farmers and have a better visibility of Ukrainian grain supply. Grain marketing Kernel, being among the top exporters of grain from Ukraine, accounts for around 10% of Ukraine s total grain exports and approximately 4% of Russia s, making us a key player in both countries and one of the largest exporters of grains from the Black Sea region. During FY 2016, we exported 4.4 million tons of grain, with 1.6 million tons of grains produced by Kernel s farming division and 2.8 million tons bought from thousands of farmers. Our infrastructure and scale in combination with prudent risk management is the cornerstone for success in this low-margin, high-volume business. Similar to the sunflower oil segment, we are averse to commodity price volatility and risks, thus following a balanced book policy: selling grain though forward contracts in a similar time frame as when we purchase it from farmers on the spot market. Our crop structure and destination mix is comparable to the traditional export distribution for the countries we operate in, with the dominant export crop being corn in Ukraine and wheat in the Russian Federation. Export terminals In Ukraine, Kernel owns a 4-million ton transshipment facility located on the Black Sea coast in Chornomorsk (formerly Illichevsk). In the Russian Federation, we operate the Taman grain export terminal via a 50/50 joint venture, with our share of capacity standing at 2 million tons in FY2016. In both countries, export terminals are deepwater facilities capable of loading Panamax vessels with deadweight of up to 70,000 tons, providing materially cheaper logistic advantages. Therefore, our port facilities are essential for our large-scale grain export operations, with the history of material increases in our grain sales after the acquisition of our port in Ukraine and joint venture in the Russian Federation serving as the best proof. As with the silo services business, the combination of high capital expenditure and land area limitations for any new port facility ensures high margins, historically in the range of 47-65%, with natural barriers to entry. Strategy With the Black Sea being the world s fastest growing region in terms of grain production and exports, and with farmers continuously developing their crop cultivation technologies, our midterm strategy stands at doubling grain exports and expanding our export terminals throughput capacity by investing into the greenfield construction of a 4-million-ton deepwater grain export terminal in Chernomorsk (formerly Illichevsk) next to our existing Transbulkterminal facility. Looking ahead, we expect to scale our origination in Ukraine by preserving the cornerstones of our business model: focusing on margins, balanced book policy and scale. Silo services EBITDA (USD/ton) Grain segment EBITDA (USD/ton) Export terminals EBITDA (USD/ton) FY2012 FY2013 FY2014 FY2015 FY2016 FY2012 FY2013 FY2014 FY2015 FY2016 FY2012 FY2013 FY2014 FY2015 FY2016 Source: Kernel. Source: Kernel. Source: Kernel. Kernel Holding S.A. Annual and Accounts 30 June

24 Grain and Infrastructure continued Strategic performance Our grain and infrastructure business is reported under three segments: silo services, grain marketing and export terminals. While these operations are closely interconnected, internal transactions are reported on an arm s-length basis. The overall EBITDA contribution of these segments reached USD million in FY2016, down 6% from previous year, predominantly due to weaker grain export volumes and margins posted in FY2016. Grain and infrastructure EBITDA contribution, USD million Export terminals Silo services Grain Source: Kernel FY2012 FY2013 FY2014 FY2015 FY2016 Grain marketing Grain export volumes stood at 4.4 million tons, down 7% y-o-y, due to the change in seasonality of grain exports from Ukraine and the accumulation of pre-sold stock to meet stronger demand for deliveries in Q1 FY2017. For instance, in Q3 FY 2016, we reached record sales volumes of 1.4 million tons primarily caused by capacity improvements at our grain transshipment facility in Ukraine and the overall acceleration of grain sales driven by reinstatement of the grain export VAT refunds on 1 January At the same time, the segment s revenues decreased by 22% to USD million, as the weak international pricing environment. The grain export margin decreased 16% y- to-y to USD 10.5 per ton, but remained flat in relative terms. Similar to our sunflower oil segment s EBITDA, in particular, slow selling activity by the farmers during October to January, resulted in a margin squeeze as exporters offered to incentivise farmers by higher prices. Grain and infrastructure segments performance Grain FY2016 FY2015 y-o-y Revenue USD million ,053.3 (22.0%) EBITDA USD million (22.1%) Volumes sold million tons (7.0%) Revenue per ton USD/ton (16.1%) EBITDA margin USD/ton (16.2%) EBITDA margin % 5.6% 5.6% (0.0pp) Silo services FY2016 FY2015 y-o-y Revenue USD million (9.9%) EBITDA USD million % Throughput volumes million tons % Revenue per ton USD/ton (19.4%) EBITDA margin USD/ton % EBITDA margin % 61.2% 43.2% 18.0pp Export terminals FY2016 FY2015 y-o-y Revenue USD million % EBITDA USD million % Throughput volumes (1) million tons % Revenue per ton USD/ton % EBITDA margin USD/ton (0.2%) EBITDA margin % 65.4% 66.6% (1.2pp) Grain and infrastructure total EBITDA USD million (6.4%) 1 Volumes exclude transshipment through the Taman facility, which is owned via a joint venture and accounted for under equity method of accounting. Source: Kernel. Export terminals Our export terminals throughput was up 11%, thus setting a record level of 5.3 million tons transshipped in FY2016, as we increased the share of grain exports through our own terminals after de-bottlenecking grain intake capacity in Ukraine and expanding the storage capacity at our Taman facility in the Russian Federation. In Ukraine, our revenues stood firm at USD 57.3 million, up 4% y-o-y and the segment s EBITDA was USD 10.1 per ton, remaining flat, in relative terms at a 65% margin versus 67% a year ago. As a result, the segment s EBITDA, which reflects Ukrainian operations, was USD 37.5 million, unchanged y-o-y. In the Russian Federation, where we operate through a joint venture and report contributions under the equity method of accounting, the terminal posted EBITDA of USD 5.9 million in FY 2016, versus USD 5.1 million a year ago. Silo services The silo service segment s revenues declined 10% y-o-y to USD 38.2 million in FY 2016, as drier weather conditions resulted in a 10% y-oy decrease in volumes of drying services provided. At the same time, the cumulative grain and oilseed intake at inland silos increased 13% y-o-y and reached 2.8 million tons in FY 2016, as we improved the turnover of our storage facilities and streamlined the customer base. The silo services EBITDA increased 28% to USD 23.4 million in FY2016, as costs deflated, driven by lower natural gas prices and the devaluation the of national currency. FY2017 outlook As Ukraine s total grain exports are forecasted to increase by 7% y-o-y in 2016/17, we also expect to maintain our market share, which should be in line with the overall trend in exports pattern and solid production in our farming division. Following the de-bottlenecking of our Chernomorsk (former Illichevsk) facility in Ukraine and the expansion of the Taman storage capacity, both facilities are well-positioned to accommodate the expected growth in grain exports from the region to drive throughput volumes up in FY Kernel Holding S.A. Annual and Accounts 30 June

25 Grain and Infrastructure continued Strategic Non-financial performance Health and safety performance During the year ended 30 June 2016, there was a minimum number of work-related injuries 2 in our grain and infrastructure business, compared to eleven a year ago. As a part of a group-wide initiative to align our health and safety management practices with OHSAS standards, we trained our health and safety specialists under these standards two years ago and launched comprehensive hazard risk identification and mapping. For more details on our health and safety performance, please refer to page 41 of this report. Employee training and development In addition to our regular activities to train and develop our personnel, we expanded our dedicated corporate MBA for the middle management of our grain and infrastructure segments. The two-year part-time program consists of a mix of case studies, lectures and team projects, taught and led by lecturers who also teach at certified MBA programs. See more details on page 39. Energy consumption and emissions intensity Our energy consumption within the grain and infrastructure segments decreased by 24% y-o-y to 634,000 gigajoules in FY2016, mainly as a result of dryer weather conditions during autumn. Grain drying is the most energy-intense part of this segment, and dryer weather led to lower demand from farmers for this service. At the same time, energy intensity remained similar to the previous year, with 66 megajoules spent for each percentage of moisture removed from one ton of grain dried, compared to 67 mega joules a year ago. For full group disclosure of energy consumption, emissions and intensity ratios, see pages of this report. Grain and infrastructure energy consumption and energy intensity ratio 1, FY2012 FY2013 FY2014 FY2015 FY2016 Energy spent per ton-% of grain dryed Total energy consumption, thousand GJ Source: Kernel. Kernel Holding S.A. Annual and Accounts 30 June

26 Strategic Farming In FY2016, our farming division delivered another year of a record earnings owing to improved operating performance and depreciation of the cost base Revenue $358.1m +15% y-o-y EBITDA (before head office expenses) $146.0m +49% y-o-y Our business model Kernel grows grains and oilseeds on 390,000 hectares of leasehold farmland in the central and western regions of Ukraine, yielding approximately 1.8 million tons of agricultural produce. Our crop mix remains relatively consistent, with corn being the dominant crop at a 36% share, followed by wheat and sunflower seed sharing equally 21%, and soybean with 15%. Almost immediately after the harvest, we process crops through our supply chain by adding value and earning incremental profits along the way. Our grains are stored at the silos and transshipped through our export terminals to international markets, while sunflower seeds are crushed at our sunflower oil production facilities. FY2016 performance In December 2015, the Ukrainian parliament approved changes to the tax code which reinstated VAT refunds on grain exports starting 1 January 2016, effectively increasing farm gate prices and reduced VAT benefits previously available to the farming segment. The change is beneficial for our farming segment, because its net effect is a reduction of the cost base. Prior to this change, the VAT paid on inputs was expensed as part of the production costs. FY2017 outlook and strategy Looking forward, Kernel aims to strengthen its farming operations by further streamlining and digitalizing processes to increase productivity and yields, thus assuring the sustainability of our production and decreasing the human factor in the decision making process. In FY2016, we continued to benefit from changes in technology and a management system implemented several years ago. Our corn and sunflower yields steadily improve. While weather conditions were challenging in western Ukraine during the season, we managed to limit the decline in winter wheat and soybean yields. Also, we cultivated rapeseed with yield 65% higher than Ukraine s average 4.3 tons per hectare. Our farming business EBITDA posted a record level of USD million, stemming from a combination of lower production costs and yield improvements. Kernel Holding S.A. Annual and Accounts 30 June

27 Farming continued Strategic Our markets Being an export-oriented company, our selling prices mirror global trends. Worldwide grain production has been surpassing consumption for the third consecutive year, pushing down global prices for soft commodities. At the same time, devaluation of the Ukrainian hryvnia lowered the US dollar value of railway tariffs, which resulted in a decrease in the difference between prices at farm-gate and in ports on the Black Sea, improving the profitability of crop producers. Key market trends Continued prevalence of grain production over consumption is expected to keep international prices under pressure. Devaluation of currencies in emerging markets reduced the USD denominated cost base of crop production supporting profitability of farmers. Changes in tax legislation effective from 1 January 2016 had a net positive contribution to farming earnings. Wheat production, utilization and stocks (million tons) Coarse grain production, utilization and stock (million tons) Average farm-gate prices in Ukraine (USD/ton, ex. VAT) /07 08/09 10/11 12/13 14/15 16/17F /07 08/09 10/11 12/13 14/15 16/17F Corn Wheat Sunflower Soybean Production (RHS) Domestic Consumption (RHS) Ending Stocks (LHS) Production (RHS) Domestic Consumption (RHS) Ending Stocks (LHS) FY2014 FY2015 FY2016 Source: Kernel Kernel s farmed acreage crop mix 16% 22% 15% 24% 23% 7% 9% 7% 7% 16% 17% 17% 15% 26% 18% 16% 21% 9% 8% 19% 21% 48% 42% 41% 36% FY2013 FY2014 FY2015 FY2016 FY2017 Corn Wheat Sunflower Soybean Other Source: Kernel. Note: Differences are possible due to rounding. Kernel Holding S.A. Annual and Accounts 30 June

28 Farming continued Strategic Our business model Large-scale farming Our farming cultivates crops on 390,000 hectares of leasehold farmland in Ukraine s western and central regions which are rich with black soil and receive sufficient precipitation. As the third largest crop producer in Ukraine, Kernel grows approximately 1.5 million tons of grains and 0.3 million tons of oilseeds, with approximately 36% attributable to corn, 21% to sunflower, 21% to wheat, 15% to soybean, and the balance to other minor crops. Our operations are structured within nine production clusters, with functions and decision-making sufficiently decentralized, thus ensuring production teams to make timely decisions. Moreover, Kernel utilizes a bottom-up budgeting and planning approach, with top-down control, meaning that our central office is responsible for strategic decision-making and key input procurement, while the regional clusters oversee operations. Modern and sustainable production technology Our production technology and approach is designed to ensure the long-term productivity of our soil. We use non-gmo seeds either supplied by top international suppliers or grown internally from high-quality parent seeds. Kernel continues to apply a balanced fertilization technique aimed at enriching its soil by utilizing both organic and mineral nourishments. Unlike many Ukrainian farmers, we apply most of our fertilizers in autumn, ahead of the spring planting campaign. Autumn application is beneficial for several reasons, the major ones include: a longer time for the nourishments to be absorbed by the land, the capability of applying fertilizers in liquid or fast-dissolving form, and the ability to finish the spring planting campaign within a shorter period of time. Our crop rotation cycle is designed to mitigate the buildup of pathogens and pests while improving soil structure. Furthermore, Kernel has never compromised on environmental risks, thus dealing only with well-known international companies and applying only pesticides approved by the Ministry of Ecology and Natural Resources of Ukraine. We test all of pesticides at our modern laboratories as an additional measure of control. We continue to develop our production technology. Just last year, Kernel introduced the application of fertilizer to a deeper soil level (ca. 25 cm under the ground), thus concentrating around the plants root system ensuring faster absorption. Crop production cycle FY2015 FY2016 Corn Land preparation Fertilization Planting Plant protection Harvesting Selling Sunflower Land preparation Fertilization Planting Plant protection Harvesting Selling Soybean Land preparation Fertilization Planting Plant protection Harvesting Selling Winter wheat Land preparation Fertilization Planting Plant protection Harvesting Selling Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Kernel Holding S.A. Annual and Accounts 30 June

29 Farming continued Strategic Leasehold land operations In accordance with Ukrainian legislation, agricultural land cannot be traded, and all farmers lease land from its current owners. Approximately 80% of the land is owned by private individuals in small land plots as a consequence of the land distribution process implemented in the 1990s after the collapse of the Soviet Union. Another 20% of agricultural land is owned by the state and state-owned enterprises. We lease this land through contracts with an average maturity of 10 years, with such contracts containing the right of first refusal to prolong leases or buyout of the land should the land market open up in the future. During FY2016, there was a debate around the benefits and possible prospects of lifting the moratorium on land trading, but as of the date of this report s publication the topic is still under discussion. Acreage harvested by crop, thousand hectares Crop yields (tons / ha) FY Corn Wheat Sunflower Soybean FY FY2012 FY2013 FY2014 FY2015 FY2016 Corn Wheat Sunflower Soybean Other Source Kernel. Management accounts 1.8 FY2014 FY2015 FY2016 performance Our farming segment continues to set records with its revenues increasing by 15% y-o-y and amounting to USD million in FY2016, reflecting intragroup sales to our export companies in 1H FY2016 and changes in legislation. Namely, in December 2015, the Ukrainian parliament approved a change to the tax code which reinstated VAT refunds on grain exports starting 1 January 2016 and reduced VAT benefits previously available to the farming segment. The change is beneficial for our farming segment because its net effect is a reduction of the cost base, as VAT paid on inputs was previously expensed as part of production costs. As a result, Kernel has accelerated the export sales of corn and wheat as the reinstatement of VAT refunds on grain exports significantly improves farm-gate prices. The segment s EBITDA increased 49% y-oy to USD million in FY2016, because of the cost-driven growth in farming s profitability. Namely, production costs per hectare declined y-o-y, driven by lower land lease, labor and energy costs as well as strong crop yields. The changes we implemented to our production technology following an overhaul of the management team in 2013 were major factors behind the growth in crop yields over the last three years: We continued our primary application of fertilizers in autumn, which allowed us to use liquid nourishments that have higher absorption rates that result in better vegetation periods; In 2016, we deepened the application of our fertilizers to around 25 cm, thus ensuring close proximity to the crops root system and fostering overall development; Farming segment s performance Also, we applied approximately 20% of our fertilizer during our planting campaign, thus boosting plant cultivation during the most crucial period; We moved the significant portion of tillage and soil leveling to autumn, which led to the completion of our spring planting campaign within a shorter time frame; Higher quality plant protection products were procured; A significant portion of managerial responsibilities have been pushed down to regional levels, with decentralization improving the speed of decision-making within the internal controls and procedures frame. Overall, the farming segment s profitability this year reflects better y-o-y earnings resulting from lower production costs amid consistently strong crop yields. FY2017 outlook In a nutshell, the financial contribution of our farming segment in FY2017 is expected to be comparable to the previous year s levels, which reflects our committed approach to sustainable efficiency and increasing productivity. The weather was favorable during the pollination periods for our major crops and the yields are expected to increase on average by double digit percentage, reflecting the changes in cultivation and tillage technology. As of the date of this report s publication, we have successfully launched an ambitious project, #DigitalAgriBusiness, which, through big data analytics and machine learning, shall transform the traditional way of thinking about large-scale farming and its operations to streamline processes and result in prompt decision-making. FY2016 FY2015 y-o-y Revenue USD million % EBITDA USD million % Net IAS 41 gain USD million 20.1 (6.8) n/m Volumes sold thousand tons 1, , % Acreage harvested thousand hectares % Revenue USD/hectare % Adjusted EBITDA margin 1 USD/hectare % Adjusted EBITDA margin % 35.1% 33.7% 1.4pp 1 Adjusted EBITDA per hectare is calculated as the farming segment s EBITDA excluding net IAS 41 gain, divided by acreage harvested. Source: Kernel. Source: Kernel Kernel Holding S.A. Annual and Accounts 30 June

30 Farming continued Strategic Non-financial performance Health and safety Tragically, there was one fatal incident at our farming division. Overall, there were 10 workrelated injuries at our farming division in the year under review, compared to 5 incidents a year ago. As a result of increased injury rates during the year, we enhanced our health and safety team, and trained specialists in accordance with the requirements of OHSAS Employee training and development We focused on training for our farming division within three primary categories: improving the managerial skills of our middle management, developing professional knowledge and competencies across personnel, and keeping health and safety knowledge fresh. During the year ended 30 June 2016, with a total of almost two hundred hours of lectures and training, the group of our middle-management and specialists was taught by lecturers hired from certified MBA programs, and by the top management of our company. To develop the general professional skills of our agronomists, machinery engineers, and finance and human resource specialists, we operate a dedicated learning center where we teach primarily short-term courses. Additionally, we conduct annual and semi-annual in person meetings to foster knowledge and best practice sharing across our operations, which are spread across the country. Energy consumption and emissions intensity Growth in the productivity of our crop production has also resulted in a material decline in our energy consumption in FY2016. For the second consecutive year, drier weather during our harvesting campaign required us to spend less natural gas for drying crops, resulting in total energy consumption being decreased by 7% compared to the previous year. However, as our technology improvements resulted in sustainability of our total production tonnage at the level of 1.8 million tons of grains and oilseeds, average energy spent per ton of product decreased 14% y-o-y. Giving back to local communities Rural communities within the scope of our farming operations are a key focus of our company s social and charity activities. More than two hundred of our employees serve as relationship managers with their respective communities, some working full-time in this role while others are part-time. Direct contact with local residents allows us to plan and execute our social activities in the most efficient way and receive direct feedback on the impact of our operations on communities. Our key areas of investments in communities in FY2016 were improvements in local schools and kindergartens, infrastructure and healthcare. For comprehensive detail on our activities, please refer to page 41 of this report and the website of our charitable foundation, razom.kernel.ua (in Ukrainian). Farming segment s performance ,136 1, , ,361 FY2012 FY2013 FY2014 FY2015 FY2016 Energy spent per ton of grain grown. MJ Farming total energy consumption. thousand GJ Source: Kernel Kernel Holding S.A. Annual and Accounts 30 June

31 Risks and Uncertainties Strategic Kernel s risk identification and mitigation system 5 Risk management process enhancement Risk identification 4 1 Monitoring of plan execution Risk assessment and prioritization 3 2 Risk mitigation plan development and execution As a part of our annual strategy management, Kernel identifies and manages key risks through the development of detailed mitigation plans. The process of key risk identification, prioritization and risk control measure development is facilitated by the working team, which is headed by the CFO, includes the heads of the financial controlling and internal audit departments, and also involves managers of the divisions and support functions. As a result of the latest review cycle, the following list was approved by the board of directors as a the top risks faced by the Company. Kernel s TOP 10 risks Industry-related risks Sunflower seed harvest in Ukraine Grain harvest in Ukraine and southern Russia Agricultural commodities price volatility Legislative risks Changes in corporate legislation Adverse changes in taxation Sustainability concerns Operational risks Inventory safety Information technology adequacy Fraud and fraudulent activity Land lease prolongation and the land bank size Kernel Holding S.A. Annual and Accounts 30 June

32 Risks and Uncertainties continued Strategic Industry-Related Risks Harvest size Sunflower seed harvest in Ukraine Possible impact Utilization of oilseed crushing plants depends on the availability of sunflower seed production in the domestic market. Low availablility may have a negative impact on both capacity utilization and crushing margins, adversely affecting the Company s earnings and financial standing. Management approach Our primary strategy is to have a diversified asset base across the sunflower seed growing region: our crushing plants are located from the south to the northeast of Ukraine. Additionally, we create and monitor sunflower seed profitability and balances by regions, including analysis on the basis of satellite pictures. Grain harvest in Ukraine and southern Russia Possible impact Approximately 75% of our grain exports and export terminal throughput and 50% of our silo service intake volumes are originated from third-party farmers. A lower harvest may result in lower revenues and profit from the entire value chain of both owned and purchased grain sales. Management approach Over the last several years, we have significantly diversified our origination base. Our farming production now contributes to 25% of our total grain export and export terminal throughput volumes. We introduced a harvest report based on data from our silo network, thus monitoring overall regional grain production. Agricultural commodities price volatility Sunflower oil price volatility Possible impact Significant movements in sunflower oil prices within a short period of time during certain periods of the year could adversely affect the Company s earnings. Management approach Kernel s approach to mitigating commodity price risk is based on a balanced book policy. As we buy sunflower seed on a spot basis, within a similar time-frame we enter into forward contracts to sell sunflower oil, thus fixing the selling price and volumes in advance. While this policy allows us to mitigate most of the risk, a certain seasonality mismatch between sunflower seed procurement and demand for edible oils could cause our exposure to price volatility to rise during some periods. Corn price volatility Possible impact A significant decrease in the price of corn, the major crop produced by our farming division, could materially undermine our farming segment s profitability. Management approach We start selling next year s crop as soon as we have the initial understanding of the next year s production costs. Utilizing a set of hedging tools, including CME futures and options, forward contracts for Black Sea origin premium and direct forward contacts, we aim to hedge 75% of the next year s crop prior to its harvesting. Prolonged period of low global soft commodity prices Possible impact Although our sunflower oil, grain export and infrastructure businesses have limited exposure to soft commodity price levels, our farming segment (21% of total assets) is directly exposed to soft commodity prices. Therefore, low crop prices, corn in particular, have an adverse effect on our earnings, but primarily through the farming segment. Moreover, a prolonged period of low global soft commodity prices, if it occurs, could cause a structural shift in crop production in Ukraine, which would decrease the country s overall harvest size. Management approach Our approach is based on utilization of hedging instruments. For instance, we sell a portion of our own farming division s harvest in advance, employing CME corn and soybean futures and options, and forward contracts for a Black Sea origin premium to hedge for a longer horizon. Shorter terms are hedged with physical forward contracts for delivery within six months. Kernel Holding S.A. Annual and Accounts 30 June

33 Risks and Uncertainties continued Strategic Legislative risks Changes in corporate legislation Possible impact Recently in the world, including EU and Switzerland, there has been a tendency for the revision of off-shore legislation which could adversely affect the Group s legal structure and/or lead to an increase in administrative expenses for the trading companies. Management approach We recognize the importance of global changes in legislation; therefore, we maintain continuous dialogue with a team of external lawyers to anticipate and prepare for changes in existing legislation. Adverse changes in taxation Possible impact Volatile tax legislation in Ukraine and uncertainty around the timing of taxation changes. Management approach We continue to develop and advance our strict procedures for acquiring raw material in order to ensure the highest quality of tax-required documents. Also, any expected changes in taxation are immediately accounted for in pricing by our grain and oilseed procurement teams. In addition, over the past several years, the Ukrainian government has maintained a constructive dialogue with the leading exporters of grain crops, which has resulted in better predictability of government policies. Sustainability concerns Possible impact Being a socially responsible company, Kernel recognizes the threat of unsustainable development. Failure to comply with health, safety and environment (HSE) state regulations might result in stoppage of oilseed crushing plants, silos and other agribusiness related operations, which shall have an adverse effect on the Company s earnings. Management approach We continue to implement the ISO/OHSAS certification of our key assets to comply with the standards for health and ecology. Additionally, Kernel aims to centralize the safety measurement systems and its environmental policies at regional levels, with the coordination and control managed by the central office. Operational Risks Inventory safety Possible impact Insufficient quality control over the existence and custody of grains and oilseeds during the purchasing campaign and storage at silos. Additionally, the safety of the Company s inventories stored at third-party silos is subject to fraudulent activity and bankruptcy of the silo owner, which, if material, could result in a write-off of current assets of the Company. Management approach Our stock keeping procedures undergo periodical audits, and we are gradually increasing the level of automation of the process at our storage facilities. Each of our counterparties undergo rigorous due diligence and screening prior to grain and oilseed purchasing and storage at those silos. As an additional measure, we follow a prudent insurance policy for our goods and periodical inventory counts are performed to mitigate the risks. Information technology adequacy Possible impact Inefficient automation of the Company s processes or the failure of the existing ERP system might increase the business s exposure to fraudulent activity, reduce accuracy of business, and affect the Company s standing. Management approach A recent change to the organizational charter has resulted in CIO onboarding and the initiation of several work-flow optimization projects, collectively aimed at increasing the automation of our business processes. Also, we have expanded the coverage of our enterprise resource planning, launched the #DigitalAgriBusiness project and, among other projects, commenced a digital document flow initiative. Kernel Holding S.A. Annual and Accounts 30 June

34 Risks and Uncertainties continued Strategic Operational Risks Fraud and fraudulent activities Possible impact The Company s operations are subject to both internal and external fraud risks, ranging from simple theft and inventory management to fraudulent procurement practices and conflicts of interest. Failure by one of the Company s significant counterparties to honor their contracts might negatively affect the Company s financial position and its performance. Management approach The Company actively manages fraud risk through continuous improvements of its business processes, periodic assessments conducted by internal auditors, and through the dissemination of Kernel s values among its employees. Also, we follow a conservative counterparty risk policy in both domestic and global markets. When buying grain and sunflower seeds from farmers, we rarely provide any pre-payments unless we have an established line of credit with ensured delivery at a fixed future date. When selling our goods to international markets, we execute delivery either against letters of credit or limit counterparty risk by selling only to established global players. Land lease prolongation and relations with local communities Possible impact The Company s farming division leases the land it farms from numerous individual owners across Ukraine for an average term of approximately seven years. There is a significant dependence on the land bank size from Kernel s reputation in the regions. Also, there is a trend of growing competition for the land plots from the local farmers. If the land trading moratorium is lifted, there is a risk of additional land legislation amendments and sales of small plots which form the Company s land bank. The combination of those items might result in a decrease in acreage farmed. Management approach Our strategic approach is to pay market price for land leases, but positively differentiate ourselves from competitors through reliability, active support for the communities, and promoting the sustainability of our farming practices. We employ dedicated teams of relationship managers to the villages where we operate which will allow us to keep direct contact with our land lessors and respond to community needs. Other risks identified by the Company s management include: Increase in competition; A prolonged period of weak economic growth, either globally or in the Company s key markets; Economic policy, political, social, and legal risks and uncertainties in certain countries in which Kernel Holding S.A. operates; Any loss or diminution in the services of Mr. Andriy Verevskyy, Kernel Holding S.A. s chairman of the board of directors; The risk that changes in the assumptions underlying the carrying value of certain assets, including those occurring as a result of adverse market conditions, could result in the impairment of tangible and intangible assets, including goodwill; The risk of fluctuations in the exchange rate of the Ukrainian hryvnia or Russian ruble to the US dollar; The risk of disruption or limitation of natural gas or electricity supply; The risk of disruptions in Kernel Holding S.A. s manufacturing operations; The risk of product liability claims; The risk of potential liabilities from investigations, litigation, and fines regarding antitrust matters; The risk that Kernel Holding S.A. s governance and compliance processes may fail to prevent regulatory penalties or reputational harm, both at operating subsidiaries and in joint ventures; and The risk that Kernel Holding S.A. s insurance policies may provide inadequate coverage. Kernel Holding S.A. Annual and Accounts 30 June

35 Sustainability Strategic Social spending $1.7m -13% y-o-y Energy consumption 5,132 terajoules -15% y-o-y Sustainability section is prepared in accordance with GRI G4 Core framework. For GRI content index, see page 48. We are committed to be a responsible partner to local communities where we operate; as a farmer, we aim to improve the fertility of our land; as a value chain manager, we seek to assure the highest quality of our products across the supply network. Our approach We base the long-term sustainability of our business on several pillars. We aim to produce our harvests in an efficient and effective way, with the lowest energy consumption and in strict compliance with regulatory, product safety and quality standards. Additionally, we strive to grow our crops to maximize the long productivity of our soils and guarantee the efficient use of resources. We put our people as the very core asset of our business. Therefore, we develop our employees through a variety of means, and ensure that their health and safety is always a top priority. Finally, we support the communities, where we have a presence, by investing in social development projects with a particular focus on rural regions. FY2016 performance We continued to reduce our carbon footprint. In FY2016, it declined to 207 thousand tons in CO2 equivalent, down 17% y-o-y, as we divested our crushing facilities in Russia and advanced our biomass energy production which stood at saving 72 million cubic meters of natural gas. In our farming division, we advanced the monitoring and control of fuel usage, boosted efficiency twofold at one of our farms by exchanging all of its machinery with fewer units of John Deere equipment which were specifically made for our purposes. During the financial year ended 30 June 2016, we have further advanced our communication with the rural regions by extending the number of dedicated relationship managers and listening directly to the communities representatives, thus structuring our social activities in the most manageable way. As a result, we increased our social spending to UAH 39,6 million, up 29% from the previous year, but down 13% in US dollars due to the depreciation of local currency. FY2017 outlook Our pipeline of projects includes the following: further optimization of resource utilization at our farming division, with the gradual implementation of #DigitalAgriBusiness, launching a project to upgrade all of our biomass boilers, continuing the feasibility study for biomass electricity generation and promoting the development of the rural regions by advancing infrastructure, medical care, education and living standards in communities where we operate. Kernel Holding S.A. Annual and Accounts 30 June

36 Sustainability continued Key non-financial KPIs FY2016 FY2015 FY2014 FY2013 FY2012 Total number of employees 14,075 15,229 16,518 17,603 17,743 sunflower oil 17% 18% 17% 17% 17% grain and infrastructure 23% 20% 20% 18% 18% farming 55% 58% 59% 59% 54% headoffice and other 5% 4% 4% 6% 11% Total injury accidents incl. fatalities Injury frequency rate accidents/million worked hours Total training expenditures thousand USD Total social spending thousand USD 1,668 1,915 2,703 1, Direct (Scope 1) GHG emissions thousand tons of CO 2 equivalent Total energy consumption thousand gigajoules 5,132 6,026 6,321 6,279 7,248 incl. renewable thousand gigajoules 2,561 2,849 2,549 2,462 2,553 Renewable energy produced and sold thousand gigajoules Energy spent per ton of sunflower seed crushed megajoules 1,408 1,463 1,525 1,536 1,594 Energy spent per ton-% of grain dryed megajoules Energy spent per ton of grain grown megajoules ,072 1, Sunflower oil produced at ISO certified plants % 100% 96% 94% 92% 92% Source: Kernel. Injury frequency rate (accidents per million worked hours) Total social spending (USD thousand) Energy consumption (thousand gigajoules) 7,248 6,279 6,321 6, ,703 5, ,410 1,919 1,668 FY2012 FY2013 FY2014 FY2015 FY2016 FY2012 FY2013 FY2014 FY2015 FY2016 FY2012 FY2013 FY2014 FY2015 FY2016 Source: Kernel. Our approach to materiality and report content This report is prepared in accordance with G4 guidance ( Core option) issued by GRI and contains elements of integrated reporting. Management considers capital providers and employees to be key target audiences for the annual report of the Company, while communication with other stakeholder groups is primarily done through other communication channels. This report focuses on material issues determined as such based on responses to questionnaires run separately for employee and capital provider groups and a managerial assessment of the aspects importance for the sustainable development of the Company. Following the materiality exercise, the list of aspects to be disclosed was approved by the executive management. See an index of GRI content on page Kernel Holding S.A. Annual and Accounts 30 June

37 Sustainability continued Key stakeholder groups and engagement channels Website Hotline Social networks Direct engagement External media newspaper Intranet Events Internal Employees Management Shareholders External Debt providers and rating agencies National media + + Local media Local communities Local officials Regulatory authorities + + Suppliers Customers Other engagement channels include special publications, s, interviews, and teleconferences. Mapping material issues to external stakeholder groups Debt providers and rating agencies National and local media Local communities Local officials Regulatory authorities Customers Energy consumption and efforts to reduce it Ethical business operations Employment Employment and job creation Product safety Product safety What does the Company do to identify and combat fraud and corruption Dialogue, transparency, collaboration Land lease payments Emissions Health and safety GHG emissions Product safety Fair agriculture practices Direct economic value generated and distributed Direct economic value generated and distributed Investments in local infrastructure and social development Local investments Our environmental mission is two-pronged: avoid adverse material harm and improve energy efficiency. Kernel Holding S.A. Annual and Accounts 30 June

38 Sustainability continued Strategic Environment Our environmental mission is two-pronged: avoid adverse material harm and improve energy efficiency. Total GHG emissions, CO 2 equivalent (thousand tons, scope 1) FY2012 FY2013 FY2014 FY 2015 FY 2016 Energy consumption within the organization Our farming business consumes the most fossilfuel energy within our business model as tractors, harvesters and other machinery use diesel. Silo services are a close second as natural gas is used to dry freshly harvested grain and oilseed crops. Finally, our trucking division and oilseed crushing facilities complete the list. To improve energy efficiency in our farming division, we focus on two main areas. First, as larger tractors are more fuel-efficient than smaller tractors, we are gradually increasing the size of our machinery as we replace obsolete tractors. Given the scale of our farming operations, with each cluster 100 times larger than the average US farm, we use only large-scale machinery. All of our motor vehicles are manufactured by top global brands, and we routinely replace machinery after seven years. Under our current replacement program, new equipment is typically 20-30% more powerful than the replaced units and is the first- or second-largest available from the supplier. Second, we improve efficiency in consumption as we implement various operational changes. Although our fuel consumption per hectare rose when we increased the share of corn in our crop mix and implemented deeper tillage practices to boost corn crop yields, thus increasing our production tonnage, the amount of fuel per ton of output decreased. Over the last several years, we have also implemented numerous control points to ensure that fuel is not wasted or stolen. We installed GPS trackers and launched several control centers to monitor vehicle movements. We also equipped these vehicles with fuel sensors to eliminate diesel theft, which has historically accounted for 10-20% of fuel use. Last year we benchmarked fuel consumption to international practices and learned that our diesel consumption per hectare was within the similar range. As a next step, in the FY2016 harvesting campaign, we began to implement autopilot modes on machinery to improve fuel consumption. Moreover, we replaced all of our machinery at a 25,000-hectare farm with John Deere equipment, achieving a twofold boost in efficiency and managed to notably minimize our carbon footprint. Energy efficiency initiatives in other business divisions include the following. In the silo business, to meet quality standards of grain during intake at silo storage facilities, over the years we have been gradually upgrading our drying equipment with more energy-efficient models. Moreover, we have been redirecting commodity flows to silos with more efficient equipment, and over the next year we aim to test and develop grain driers fueled by sunflower seed husk, a waste by-product of sunflower oil production. All but one of our crushing facilities use sunflower seed husk instead of natural gas to produce the steam needed for the crushing process (see the corresponding box for more details). Moreover, next year we plan to implement the first stage of a three-year project to replace the existing biomass boiler and ancillary facilities at all of our crushing plants. Once completed, the new boilers will increase fuel efficiency and subsequently decrease emissions generated during sunflower seed husk burning. The average steam and electricity consumption of our major plants is in line with the low end of the international range, according to an energy audit conducted two years ago. As most of our carbon emissions are related to energy consumption, we manage our emissions by focusing on the optimization of our use of energy resources. At the same time, we strictly control other emissions that are naturally generated at our sunflower oil production plants, fully complying with local legislation and the specific limits set for our production plants by local regulatory authorities. For the disclosure of our emissions by type and asset group, please refer to pages of this report. Producing green energy from waste After divesting two of our Russian oilseed crushing plants, six of our existing seven facilities (94% of total capacity) use sunflower seed husks, a waste by-product of the crushing process, as their fuel source to produce the steam required for processing. Approximately 44% of sunflower seed husk produced is burned to generate steam, a process that saved us 72 million cubic meters of natural gas in FY2016. At one plant we also co-generate and sell green electricity to the national grid. The remaining volumes of sunflower seed husks are pelletized and sold to third-party co-generation plants in Poland. These plants mix sunflower seed husk with coal to reduce their consumption of fossil fuels. The portion of electricity they produce from our sunflower seed husk covers the annual demand of approximately 300,000 households. Sustainable farming Our sustainable approach to farming places an emphasis on long-term soil productivity rather than short-term profits from crops. We prudently plan our crop rotation mix with the objective of ensuring proper replenishment of nutrients in the soil, and apply balanced fertilization to restore nutrients taken out by crops. We leave straw on fields to serve as an organic fertilizer and to help reduce soil erosion. In selecting tillage technology, we develop a balance between root development and soil erosion risk, and apply different methods depending on crop, location and soil pattern. Periodically, we also conduct soil analysis, which is used to adjust our crop mix plans, production technology and fertilization practices. Additionally, we apply an integrated pest management system to ensure the thresholds are set for any pest application and that cultural methods are applied prior to the use of pesticides. Since any use of pesticides is subject to strict regulations, we test and monitor the quality of products in our laboratory prior to wide application. We do not use substances prohibited by the Stockholm Convention on Persistent Organic Pollutants and/ or substances listed in Annex 3 of the Rotterdam Convention. 99% of our acreage is non-irrigated: we use irrigation only to grow seeds for internal needs. Kernel Holding S.A. Annual and Accounts 30 June

39 Sustainability continued Waste management Our waste management approach is based on the general principles of waste hierarchy. Sunflower seed husk is by volume our main waste generated by our oilseed crushing business. Out of 364 thousand tons of sunflower seed husk produced in FY2016, 44% was burned at onsite boilers to produce the steam needed for our production process, and another 53% was pelletized and sold to third-party co-generation plants. Straw is the key waste generated by our farming division. We leave straw on our fields to act as an organic fertilizer and help mitigate soil erosion. At our silo division, approximately 50% of waste generated is reused as cattle feed and the remainder is disposed in landfills. Over the last year, we trained our environmental specialists under ISO standards and have brought our environmental management processes in line with the standards. Biodiversity The Company farms only agricultural land historically used to grow crops. We do not operate in protected areas or areas with a high biodiversity value, and our operations do not affect endangered species. At the same time, the Company s farming operations cover a significant acreage of 3,900 square kilometers, and thus could have some unintended impact on biodiversity. The crops we grow are typical to the regions we operate in, and the company utilizes well-established farming practices with proper oversight from our agronomy team. The Company applies only pesticides approved for use by the Ministry of Ecology and Natural Resources of Ukraine. Full-time employees (USD thousand) 17,743 17,603 16,518 15,229 14,075 Human capital Competitive remuneration We put people at the core of Kernel and its strategy, as well as Kernel s key competitive advantage. As a result, we strive to unveil the potential of our employees and streamline it toward achieving a sustainable growth. Therefore, we have developed plentiful retention strategies, particularly competitive compensation. As a result, we have increased the level of social benefits for our employees, as of this year. Kernel s remuneration policy is based on providing competitive compensation that matches or exceeds the levels observed in our industry. Moreover, we strictly comply with labor legislation and pay all salary-related taxes and social contributions. Investing in training and development We encourage our employees to take responsibility for their own education and development, continuously building new skills and sharing knowledge, supported by our Kernel HUB platform which helps in structuring our training activities in different directions. A significant portion of our training activities covers various groups of personnel and is aimed at developing their professional qualifications. Our training is supplied by both internal and external providers. As of this year, we are launching a coaching program Internal Trainer, where we shall encourage employees to share their valuable expertise with the rest of the company, thus fostering the sustainable development of our staff. Moreover, we continue to develop our Smart Farm training center, a fully equipped modern training facility, where we provide a module-based well-rounded education to our agronomists, machinery engineers and accounting specialists from our farming division. We invite both Ukrainian and European specialists, with the specific objectives of delivering practical knowledge related to modern farming practices. Similar programs have been extended to our sunflower and infrastructure divisions as well. Special attention is paid toward the training and development of our managerial staff, which consists of thousands of managers at different levels. Several years ago, we launched a MBA program, aimed at enrichment of general managerial skills and competencies. The module-based system is taught by lecturers, who also teach at certified MBA programs: it includes case studies delivered by top management, and term-based assignments, with a final graduation project. Training expenditures (USD thousand) FY2012 FY2013 FY2014 FY2015 FY2016 During the year ended 30 June 2016, we further promoted the idea of creating an internal talent pool to encourage both personal and professional development of a designated number of employees who have taken initiative and shown themselves as suitable and competent specialists. Through the process of rigorous screening, we have selected approximately 80 employees who will be coached in programs customized for their chosen positions. Over 7,000 employees spend approximately 150,000 hours of training in FY2016 to advance not only their professional skills but also develop their personal competencies. 30 Jun June June June June 2016 As of this year, we took our successful Agro MBA initiative one step further, by introducing an MBA Expert program to our cluster managers, thus disseminating the accumulation of professional knowledge and competencies. Kernel Holding S.A. Annual and Accounts 30 June

40 Sustainability continued Strategic Individual development system and career planning For the second consecutive year, we continue to advance our unified approach to planning individual development. While the program is still in an early stage of implementation, we almost doubled the number of covered employees, branching out to our oilseed production facilities. The primary objective of this program is to improve career planning and provide a clearer visibility of the ambitious talent pool, their training needs and prospects. In FY2016, we successfully integrated the automation of individual development planning data within Kernel s enterprise resource management software. Moreover, we have advanced the coverage of our mentorship program, through which newcomers are assigned to a mentor and their relationships are structured, formalized and overseen by a program manager. Each mentor receives an appropriate training in coaching skills that advances their ability to provide constructive feedback. In addition, within the performance management system, we introduced a benchmark and ranking, thus fostering both professional and soft skills development. Top ranked employees are included within the talent pool for each of whom an individual professional growth plan is developed. Working with universities Understanding the significance of business needs and the isolation of higher education delivered by Ukrainian universities, Kernel is actively involved in improving the quality of education. For the second consecutive year, we are cooperating with Sumy Agrarian University, advancing the quality of and the structure of educational content. As a part of this project, we have coached the faculty staff in modern approaches to crop cultivation and proposed certain changes to the curriculum. Moreover, we have selected a group of students to receive additional training, summer internships and, after successful completion of their studies, employment at Kernel. Approximately twenty people have successfully completed their studies and are now working as young specialists. Once employed, the recent graduates undergo intensive on-job training and mentoring, thus having a tailor-made career plan. In FY2016, following the second successful year at Sumy Agrarian University, we launched a similar project at Kamenets-Podilsky University in western Ukraine. Our values and principles Our core values and principles are the following: Strategic and systematic approach to management Synergy and consistency in goal setting Efficient use of resources Openness to change and innovation Integrity Responsible leadership Compliance with laws and internal rules Sustainable development Partnership and common goals Entrepreneurial spirit Mutual respect and trust Development of human potential Injuries and fatalities by business division Labor practices We continue our commitment to providing safe working conditions in compliance with labor legislation. Our commitments, among other things, include: compliance with minimum wage requirements; respect for working hours, vacations and sick leave (in FY2016, we introduced an additional vacation for special family holidays in case of marriage or paternity leave for the birth of a child); full payment of taxes and social contributions related to salaries; and retaining positions for employees on maternity/paternity leave. FY2016 FY2015 FY2014 FY2013 FY2012 Fatalities Sunflower oil 1 2 Grain and infrastructure Farming 1 1 Non-fatal injuries Sunflower oil Grain and infrastructure Farming Total accidents Injury data was collected in accordance with local regulatory requirements in Ukraine and Russia. The injury rate does not include minor (first-aid level) injuries and does not include contractors working on-site. Kernel Holding S.A. Annual and Accounts 30 June

41 Sustainability continued Strategic Human rights Kernel is committed to developing a group-wide culture that implements a policy of support for internationally recognized human rights, seeks to avoid human rights abuses within our sphere of influence and makes sure we are not complicit in human rights abuses. Supporting the guidelines set by the United Nations Global Compact, we are against all forms of child labor and any forced or compulsory labor. We respect our employees privacy, and since FY2016 we formalized the conflict of interest policy. The right of collective bargaining is embedded in the collective agreements that exist at all of our subsidiaries, with all due respect to workers rights to form associations and join organizations of their own choice. We are also committed to not discriminating on the basis of gender identity, religion, race, color, sex, sexual orientation, disability, or national or ethnic origin. Our commitment is embedded in our Code of Conduct and in collective agreements at our subsidiaries. To ensure group-wide compliance with our policy, we operate a hotline that employees can use to report violations, and we encourage our workers to communicate concerns to their supervisors, or if not possible, to a local HR specialist. Health and safety Acknowledging that we operate in regions with traditionally poor work-related safety cultures, we aim to improve the safety and health of our workers through various means, with our main target to reach zero fatalities and reduce injuries as much as possible. Our jobs are classified by risk exposure, and those workers who fall under medium and high hazard risk, are required to undergo compulsory safety training, the frequency of which is dependent on the risk exposure. All workplaces and production processes comply with safety requirements, with periodical third-party audits conducted. Workers are equipped with all required special work clothes and undergo medical examinations as required by their role. Most of our production units employ dedicated health and safety specialists, all of whom are supervised by a group-level health and safety committee. All of our specialists underwent training to improve their knowledge and skills under OHSAS With a medium-term goal of making the health and safety systems at most of our production units fully compliant with OHSAS 18001, we have also launched a process of hazard risk identification and ranking, which should serve as a backbone for building a proper preventive system. We also strengthened our health & safety team last year. Most regrettably, during the year ended 30 June 2016, there was one fatality. Taking precautions, we have reduced the number of non-fatal injuries at our enterprise from 18, last year, to 15 this year. Social responsibility Giving back to local communities Local communities are one of the key stakeholders playing an integral role for Kernel s operations. Therefore, we aim at building and developing long-term partnership with local groups. With the majority of our operations and twothirds of our employees working in rural regions, we aspire to act with integrity and take a great responsibility in advancing those regions. Our social activities are structured through social partnership agreements, with more than 70% of villages our operations cover already having signed agreements with us. Moreover, to act effectively and with integrity, we have established more than two hundred dedicated employees as relationship managers who advocate for the communities, thus ensuring sustainable communication channels with local councils, key opinion leaders and residents. Our approach entails structuring our activities based on what is of foremost importance for the community and receiving direct face-to-face feedback on the impact of our operations. During the year ended 30 June 2016, our direct spending to support local communities amounted to USD 1.7 million (UAH 39.6 million, up 29% from the previous year). The most significant spending was attributed to local schools and kindergartens along with critical investments in local infrastructure and healthcare. We also conducted numerous activities to engage rural citizens through the facilitation of local sports tournaments, children s art competitions and site visits to our production facilities and farm operations for older schoolchildren. Moreover, all of our charitable activities were limited to the regions of our operations. Each year we make a significant effort to maintain a continuous dialogue with our communities. We publish a corporate newspaper with a total monthly circulation of more than 50,000 copies where we provide updates on our social responsibility and business activities, and provide legal and other advice on important questions in rural regions. Moreover, we operate a telephone hotline ( ) for local communities and receive mailed feedback that often helps us improve the efficiency of our social investments, thus fostering our understanding of community needs. Most of our community support is structured through the charitable foundation Together with Kernel, which operates a standalone website, aimed at increasing awareness of our presence and improving stakeholder feedback. Economic impact Our total infrastructure spending amounted to USD 749 thousand in FY2016, excluding spending related to our business needs. Additionally, Kernel is one of the largest taxpayers to local government budgets in rural regions as we are committed to full compliance with tax payments. In FY2016, we paid USD 32 million in taxes versus USD 44 million in the previous year. Nowadays, urbanization is going forward in Ukraine, thus leaving villages and local communities unattended and in degradation. Having twothirds of our businesses in rural regions allows Kernel to support local communities through job creation and the dissemination of best farming practices, thus enhancing the knowledge and skills of our employees living there. Moreover, we have an incentivizing retention policy for our employees in rural regions, motivating them not only through material compensation, but also through showing them that joining us in our modern crop production can lead to a promising career. At the same time, we do admit Kernel s efficiency improvements result in a gradual reduction of the full-time headcount of our farming operations. Kernel Holding S.A. Annual and Accounts 30 June

42 Sustainability continued Strategic Anti-fraud and anti-corruption During the year ended 30 June 2016, we finalized the development of our group-wide anti-corruption and anti-fraud policy to assist employees in navigating through the challenges with respect to gifts, events, facilitation payments, public authorities and business partners. Those guidelines have been set to help our employees act ethically, and we strongly advise our employees to seek assistance when in doubt. Therefore, Kernel continuously pursues a policy against the slightest hints of fraudulent activities and corruption in both legal obligations and ethical commitments. As an essential part of our core values, we aspire to eliminate all forms of dishonesty, corruption and fraud across our operations. Our Code of Conduct, in combination with groupwide procedures, is committed to advise our employees on our principles of doing business and maintaining corporate integrity. Throughout the year, we continued to implement anti-corruption and anti-fraud efforts within our farming division. With the post-soviet legacy system being part of the mentality for many people in our regions of operations, our efforts have been designed to change behavior by showing strict non-tolerance to incidents of fraud and corruption. For instance, during the year ended 30 June 2016, we fired 74 people for fraudulent activity and corruption. Meanwhile, throughout all of our operations we strive to assess risks related to fraud and corruption. Key identified risks include general procurement, inventory theft, conflicts of interest, raw material procurement from unreliable suppliers, fuel consumption expensing, and excessive delegation of power. Product responsibility Being the world s largest sunflower oil producer, with an 8% international market share in 2016, we endeavor to guarantee our produce meets the highest quality benchmarks. Therefore, in light of our divesting two Russian plants in February 2016, the food safety administration frameworks at all of our sunflower oil crushing facilities in Ukraine are certified under the ISO standard, which coordinates the standards of the Hazard Analysis and Critical Control Point (HACCP) system and application of methods created by the Codex Alimentarius Commission. Our food management system is preventive and aimed at addressing the risks of potential organic, compound, and physical hazards. It also guarantees the traceability of items in our value chain. Those of our plants that produce bottled sunflower oil are additionally certified under the FSSC standard and the greater part of our production plants are certified under ISO We also guarantee control over food safety along the protein meal production and distribution value chain: production facilities are certified under GMP+B1, our truck organization is certified under GMP+B4, and transshipment and cargo chartering is certified under GMP+B3. Moreover, we continue to license our labs under the ISO standard, which permits us to expand the scope of analysis conducted at our own facilities. In our farming division, corn cultivation is certified under the RBSA standard, which indicates prerequisites set for biofuel supply chain sustainability under the Renewable Energy Directive. Additionally Kernel is certified under the ISCC EU framework for soybean, rapeseed and wheat. During the last financial year, Kernel successfully certified its corn and grain supply chain under the standards required by China. Periodically, our food safety framework is audited by an authorized third party, and is continually monitored by our in-house internal food safety team. The scope of our product safety evaluations incorporates all manufacturing and production, storage, distribution and supply processes. Product labeling and packaging Just roughly 1% of our produce is packaged and labeled (measured by tonnage), while the greater part of our produce is sold in bulk. For packaged items, we strictly follow the national regulations for which the product is destined. Typically, labeling is subject to three-phase control and requires an authorized lab or third-party issued verification for any information exhibited on the packaging. All of our crushing facilities are ISO certified Kernel Holding S.A. Annual and Accounts 30 June

43 Sustainability continued Strategic 1. Human capital indicators FY2016 FY2015 FY2014 FY2013 FY2012 GRI Index Total number of employees 14,075 15,229 16,518 17,603 17,743 G4-10 by geography Ukraine 100% 96% 97% 95% 95% G4-10 Russia & other 0% 4% 3% 5% 5% G4-10 by gender men 71% 73% 68% 70% 69% G4-10 women 29% 27% 32% 30% 31% G4-10 by age <30 years old 20% 20% 21% 18% 19% G years old 56% 55% 55% 56% 56% G4-10 >50 years old 25% 24% 24% 25% 25% G4-10 by level managers 7% 8% 7% 8% 8% G4-10 specialists 22% 20% 19% 19% 19% G4-10 workers 70% 72% 74% 73% 74% G4-10 by business division sunflower oil 17% 18% 17% 17% 17% G4-10 grain and infrastructure 23% 20% 20% 18% 18% G4-10 farming 55% 57% 59% 59% 54% G4-10 headoffice and other 4% 4% 4% 6% 11% G4-10 Percentage of women in executive management 40% 29% 29% 29% 29% Percentage of women on the board of directors 25% 25% 25% 25% 25% Note: Differences are possible due to rounding. Headcount data include full-time employees as at 30 June of the respective period. 2. Health and safety indicators FY2016 FY2015 FY2014 FY2013 FY2012 GRI Index Total fatalities G4-LA6 sunflower oil G4-LA6 grain and infrastructure G4-LA6 farming G4-LA6 Total non-fatal injuries G4-LA6 sunflower oil G4-LA6 grain and infrastructure G4-LA6 farming G4-LA6 Total accidents G4-LA6 Ukraine G4-LA6 Russia G4-LA6 Injury frequency rate, accidents/million worked hours G4-LA6 Injury data is collected in accordance with local regulatory requirements in Ukraine and Russia. The injury rate does not include minor (first-aid level) injuries and does not include contractors working on-site. Kernel Holding S.A. Annual and Accounts 30 June

44 Sustainability continued Strategic 3. Talent development FY2016 FY2015 FY2014 FY2013 FY2012 GRI Index Training expenditures USD thousand Training hours hours 150, ,426 88,382 n/a n/a G4-LA9 % of workforce taking part in standardized performance appraisals 1% 1% n/a n/a n/a G4-LA11 The Company is in the process of establishing a group-wide policy of accounting for training hours. Only expenditures explicitly classified as related to labor training are included in the calculation. These numbers are likely to underestimate actual training-related expenses due to the early stage of the practice of accounting for training-related expenses. 4. Community FY2016 FY2015 FY2014 FY2013 FY2012 GRI Index Total social spending USD thousand 1,668 1,915 2,703 1, incl. social infrastructure USD thousand 749 1,025 n/a n/a n/a G4-EC7 Operations with implemented local community engagements % of total 63.0% 64.0% n/a n/a n/a G4-SO1 Social spending includes only direct expenses by the Company. 5. Greenhouse gas emissions FY2016 FY2015 FY2014 FY2013 FY2012 GRI Index Direct (Scope 1) GHG emissions thousand tons of CO 2 equivalent G4-EN15 sunflower oil thousand tons of CO 2 equivalent G4-EN15 grain and infrastructure thousand tons of CO 2 equivalent G4-EN15 farming thousand tons of CO 2 equivalent G4-EN15 other thousand tons of CO 2 equivalent G4-EN15 Biogenic GHG emissions thousand tons of CO 2 equivalent G4-EN15 Gross indirect (Scope 2) GHG emissions thousand tons of CO 2 equivalent G4-EN15 GHG emissions intensity ratio per ton of sunflower seed crushed tons CO 2 equivalent G4-EN15 per ton of grain grown tons CO 2 equivalent G4-EN15 Scope 1 emissions are calculated based on volumes of fossil fuel used across the company and those generated by livestock. Emissions are calculated based on volumes of energy used and conversion factors sourced from DEFRA. The calculation excludes GHG emissions from the application of fertilizers and pesticides by our farming division and the effect of carbon capture during the development of crops. Currently, we are examining available calculation methodologies. Emissions from livestock farming are calculated based on the average headcount of cattle for the reporting period and established regional normative levels for emissions per head. Scope 2 emissions represent emissions from purchased electricity. The conversion factor was sourced from Global Carbon B.V. s assessment of emissions factors for the Ukrainian electricity grid. Kernel Holding S.A. Annual and Accounts 30 June

45 Sustainability continued Strategic 6. Energy consumption FY2016 FY2015 FY2014 FY2013 FY2012 GRI Index Total energy consumption thousand gigajoules 5,130 6,026 6,321 6,279 7,248 G4-EN3 by division sunflower oil thousand gigajoules 3,109 3,690 3,550 3,512 3,887 G4-EN3 grain and infrastructure thousand gigajoules , G4-EN3 farming thousand gigajoules 1,361 1,467 1, G4-EN3 other thousand gigajoules ,400 2,121 G4-EN3 by source natural gas thousand gigajoules ,435 2,172 3,153 G4-EN3 diesel, gasoline thousand gigajoules 1,322 1,607 1, G4-EN3 electricity thousand gigajoules G4-EN3 other non-renewable thousand gigajoules 3 4 G4-EN3 sunflower seed husk (renewable) thousand gigajoules 2,561 2,849 2,549 2,462 2,553 G4-EN3 by country Ukraine thousand gigajoules 5,129 5,732 5,874 5,869 6,759 G4-EN3 Russia thousand gigajoules G4-EN3 Renewable energy produced and sold thousand gigajoules G4-EN3 electricity thousand gigajoules G4-EN3 heating thousand gigajoules G4-EN3 Energy intensity Energy spent per ton of sunflower seed crushed megajoules 1,408 1,463 1,525 1,536 1,594 G4-EN5 Energy spent per ton-% of grain dried megajoules G4-EN5 Energy spent per ton of grain grown megajoules ,072 1, G4-EN5 Only energy purchased from external suppliers is included in energy consumption. Energy generated internally is excluded. Additionally, energy consumption figures exclude heating purchased from third-party suppliers due to the non-materiality of volumes. There was no consumption of externally purchased cooling and steam. The volumes of natural gas and diesel fuel used for energy production are measured by equipment installed at each point of consumption. The volumes of diesel fuel, petroleum and liquefied natural gas used in automobiles and agricultural machinery are calculated based on mileage data and approved norms of fuel consumption. The volume of sunflower seed husk used to generate steam and electricity is accounted based on records from scales installed at each point of husk consumption. Electricity purchased and used is measured by metering devices. Energy sold includes heating and electricity produced from sunflower seed husk burned at boilers located at our oilseed crushing plants. The volume of electricity sold is measured by equipment connected to the country s electricity grid. Heating sold is measured based on the volume of hot water supplied to external consumers and is measured by equipment installed at the point of consumption. All noted measuring equipment is certified and regularly checked for accuracy by independent external experts. The conversion of energy into joules is made using conversion factors sourced from DEFRA. Kernel Holding S.A. Annual and Accounts 30 June

46 Sustainability continued Strategic 7. Materials used in production FY2016 FY2015 FY2014 FY2013 FY2012 GRI Index Sunflower oil production Sunflower seeds thousand tons 2,208 2,523 2,335 2,286 2,439 G4-EN1 % of renewable % 100% 100% 100% 100% 100% G4-EN1 Associated process materials thousand tons G4-EN1 % of renewable % 0% 0% 0% 0% 0% G4-EN1 Packaging thousand tons G4-EN1 % of renewable % 61% 43% 43% 42% 45% G4-EN1 Crop production Seeds thousand tons G4-EN1 Fertilizer thousand tons G4-EN1 % of organic fertilizer % 51% 51% 44% 57% 27% G4-EN1 Other non-renewable thousand tons G4-EN1 Sunflower oil produced at ISO certified plants % 100% 96% 94% 92% 92% G4-EN1 The data excludes the grain and infrastructure business, which primarily provides services and the sugar segment, which is classified as held for sale. Fuel volumes are excluded from the calculation and are presented in a separate disclosure. Our sunflower oil production uses sunflower seed as the primary input material. Additionally, hexane is used as a component in the solvent extraction process. Less than 10% of our sunflower oil output is packaged. The cardboard we use for packaging (61% of total materials used for packaging) is sourced from reused materials. Our grain and infrastructure business primarily re-sells grain and provides logistics services, thus materials used in the production calculation are not relevant to this division. In our farming operations, we use seeds, fertilizer and plant protective production techniques as primary inputs (diesel spent is calculated in a separate disclosure). Seed usage varies based on shifts in crop mix and technology. For example, wheat planting requires 0.2 tons per hectare, while corn planting requires 0.02 tons per hectare of the respective seeds. Similarly, fertilizer usage varies because of changes in technology and the variety of available fertilizers with different nitrogen, phosphorus and potassium content. The significant y-o-y increase in FY2013 and FY2014 was primarily driven by an increase in acreage following the consolidation of acquired enterprises. 8. Aspect boundaries Material issues Material aspects and indicators disclosed Material Materiality Material within the boundaries within organization outside the organization organization Relevance outside the organization Economic performance Economic performance (G4-EC1, G4-EC4) + All business units + Impacts people and economic development in countries of our operations. Human Training and education (G4-LA11) + All business units + Training and developing our employees, as well as ensuring a proper health and safety environment, contributes to the capital social and economic development of the communities where Health and safety (G4-LA6) + All business units + we operate. Local communities (G4-SO1) Farming + Our social activities and investments in local infrastructure Giving back directly benefit regions where we operate, while our performance also indirectly impacts communities development to local Indirect economic impacts communities + (G4-EC8) through jobs and local tax payments. Reducing corruption within and outside the organization Anti-corruption Anti-corruption (G4-SO3) + All business units + improves the social-economic growth of the countries we operate in. Product responsibility Environment Sustainable farming Customer health and safety (G4-PR1, G4-FP5) + Sunflower oil + Energy (G4-EN3, G4-EN5) + All business units + Materials (G4-EN1) + Emissions (G4-EN15, G4-EN16, G4-EN18, G4-EN21) + Indirect economic impacts (G4-EC8) + Farming + Ensuring the high quality of our products benefits customers' health worldwide. Reducing energy consumption and carbon emissions contributes to the slowdown of global warming. Growing crops in a sustainable way contributes to local communities well-being. Kernel Holding S.A. Annual and Accounts 30 June

47 Sustainability continued Strategic 9. GRI G4 Content Index GENERAL STANDARD DISCLOSURES Standard Disclosure Standard Disclosure Title Strategy and analysis External Assurance Page number or direct response G4-1 Statement from the most senior decision-maker. No Chairman of the board of directors' letter (pages 6-7). Organizational profile G4-3 Name of organization. No Kernel Holding S.A. G4-4 Primary brands, products and services. No Kernel at a Glance (page 8). G4-5 Headquarters' location. No Kyiv, Ukraine. G4-6 Number and names of countries where the organization operates. No Ukraine and Russia. G4-7 Nature of ownership and legal form. No Note 2 'Change in Issued Capital' to the Consolidated (page 69). G4-8 Markets served. No Kernel at a Glance (page 9), Sunflower Oil (page 17), Grain and Infrastructure (page 22). G4-9 Scale of the organization. No Employee structure (page 45), Key highlights (page 3), Kernel at a Glance (page 8). G4-10 Workforce statistics. No Employee structure (page 43). G4-11 Percentage of total employees covered by collective bargaining agreements. by collective bargaining agreements. Approximately 95% of our employees are covered No G4-12 Description of organization's supply chain. No Sunflower Oil (page 18), Grain and Infrastructure (page 23). G4-13 Significant changes during the reporting period. No Notes 1 to the Consolidated (page 68), Sunflower Oil (page 24). G4-14 Application of precautionary approach or principle. No Product responsibility (page 42). Externally developed economic, environmental International Labour Organization s Fundamental Principles and Rights at G4-15 and social charters, principles, or other initiatives Work, United Nations Global Compact (UNGC), United Nations Universal No to which the organization subscribes or which it Declaration of Human Rights endorses. G4-16 Memberships of associations (such as industry associations) and national or international advocacy organizations. Identified material aspects and boundaries G4-17 Coverage of entities in relation to organization s consolidated financial statements or equivalent documents. G4-18 Process for defining report content and aspect boundaries No No Kernel, through its subsidiaries, is a member of several industry associations, including the Federation of Oils, Seeds and Fats Associations, the Grain and Feed Trade Association, the Ukrainian Grain Association, the Ukrainian Agribusiness Club, the Ukrainian Agrarian Association, the American Chamber of Commerce, and the European Business Association. Notes 1 to the Consolidated (page 68). Certain sustainability information does not include data for all entities, which is highlighted in each case. No Our approach to materiality and report content' on page 39. G4-19 Material aspects identified. No Page 36. G4-20 Aspect boundaries within the organization for No each material aspect. Aspect boundaries (page 46). G4-21 Aspect boundaries outside the No organization for each material aspect. G4-22 Restatements. No This is the first report presented under GRI methodology. G4-23 Significant changes from previous reporting No This is the first report presented under GRI methodology. periods in the scope and aspect boundaries. Stakeholder engagement G4-24 List of stakeholder groups engaged by the organization. G4-25 Basis for identification and selection of stakeholders with whom to engage. G4-25 Organization's approach to stakeholder engagement. G4-25 Key topics and concerns raised through stakeholder engagement. No Key stakeholder groups and engagement channels (pages 36, 37). No No No Our approach to materiality and report content' and 'Key stakeholder groups and engagement channels' on pages 36, 37. Although the frequency of our engagement varies, we are intent on staying engaged with all our stakeholders in areas of mutual interest. Mapping material issues to external stakeholders' (page 37), 'Our approach to materiality and report content' (page 36). Also discussed throughout this report. Kernel Holding S.A. Annual and Accounts 30 June

48 Sustainability continued Strategic GENERAL STANDARD DISCLOSURES Standard Standard Disclosure Disclosure Title profile G4-28 ing period. Fiscal year 2016 ended 30 June See also Note 1 N/a to the Consolidated (page 68). G4-29 Date of most recent previous report. 22 Oct 2015 As a sustainability section of the FY2015 annual report G4-30 ing cycle. No Annual. G4-31 Contact point for questions regarding the report or its contents. No Jamil Zakaraiev, j.zakaraiev@kernel.ua G4-32 In accordance' option. No This report was prepared in accordance with the GRI G4 Core option. G4-33 Policy and current practice with regard to seeking external assurance of the report. No data in Consolidated for 12 months ended 30 June 2016 was audited by Deloitte Audit; see of the Reviseur d Entreprises agree on page 59. G4-34 structure of the organization. No (pages 50-58). Ethics and integrity G4-56 Organization s values, principles, standards and norms of behavior such as codes of conduct and codes of ethics. SPECIFIC STANDARD DISCLOSURES CATEGORY: ECONOMIC Material aspect: Economic performance No Our values and principles (page 40). G4-DMA Generic disclosures on management approach. No The Group's strategy defines shareholders' value creation as an ultimate goal, which makes economic performance a material aspect. See also 'Strategy' (page 11). Also discussed throughout this report. G4-EC1 Direct economic value generated and distributed. No Page 63. See Consolidated financial statements. G4-EC4 assistance received from the government. No Note 26 'Other operating income' to the Consolidated (page 104). Material aspect: indirect economic impact G4-DMA Generic disclosures on management approach. No Indirect economic impact (page 41), Giving back to local communities (page 41), Sustainable farming (page 35) G4-EC8 Significant indirect economic impacts, including the extent of impacts. No Indirect economic impact (page 41), Giving back to local communities (page 41), Sustainable farming (page 35). CATEGORY: ENVIRONMENTAL Material aspect: Materials. G4-DMA Generic disclosures on management approach. No Materials used in production (page 46), Our approach to materiality and report content (page 36). G4-EN1 Materials used by weight or volume. No Materials used in production (page 46). Material aspect: Energy. G4-DMA Generic disclosures on management approach. No The Company is not subject to any government or industry-specific policy for energy use. Management approach disclosed in 'Energy consumption within the organization' (page 38), 'Our approach to materiality and report content' (page 36). G4-EN3 Energy consumption within the organization. No 'Energy consumption within the organization' (page 38). G4-EN5 Energy intensity. No 'Energy consumption within the organization' (page 38). Material aspect: Emissions. External Assurance Page number or direct response Kernel Holding S.A. Annual and Accounts 30 June

49 Sustainability continued Strategic SPECIFIC STANDARD DISCLOSURES Standard Standard Disclosure Disclosure Title External Assurance Page number or direct response G4-DMA Generic disclosures on management approach. No Environment' (pages 44-45), 'Our approach to materiality and report content' (page 36). G4-EN15 Direct greenhouse gas (GHG) emissions (Scope 1). No Environment' (pages 44-45). G4-EN16 Energy indirect greenhouse gas (GHG) emissions No Environment' (pages 44-45). (Scope 2). G4-EN18 Greenhouse gas (GHG) emissions intensity. No Environment' (pages 44-45). G4-EN21 NOX, SOX, and other significant air emissions. No The Company is in the process of establishing group-wide data collection for non-ghg emissions. G4-EN31 Total environmental protection expenditures. No Not disclosed. The company is in the process of adjusting its data collection system in order to consolidate this data at the group level. CATEGORY: SOCIAL SUB-CATEGORY: LABOR PRACTICES AND DECENT WORK Material aspect: Occupational health and safety. G4-DMA Generic disclosures on management approach. No Health and safety' (page 41), 'Our approach to materiality and report content' (page 36). G4-LA6 Type of injury and rates of injury, occupational diseases, lost days, and absenteeism, and total number of work-related fatalities, by region and by gender. No Health and safety' (page 43). Certain indicators are not disclosed because they are not tracked by the company's management system. Material aspect: Training and education. G4-DMA Generic disclosures on management approach. No Investing in training and development' (page 39), 'Our approach to materiality and report content' (page 36). G4-LA9 Average hours of training per year per employee by gender, and by employee category. No This data is currently not tracked. The Company is assessing ways to incorporate this data into its management accounting system. G4-LA11 Percentage of employees receiving regular performance and career development reviews, by gender and by employee category. No Kernel started implementing a group-wide performance management system. Approximately 1% of all employees are covered by the program. SUB-CATEGORY: SOCIETY Material aspect: Local communities. G4-DMA Generic disclosures on management approach. No Giving back to local communities' (page 41), 'Our approach to materiality and report content' (page 36). G4-SO1 Percentage of operations with implemented local community engagement, impact assessments, and development programs. No We calculate that 64% of our operations (by labor count) are actively involved in local community engagements, though the frequency and depth of engagement differs by region. See 'Giving back to local communities' (page 41) for details. Material aspect: Anti-corruption. G4-DMA Generic disclosures on management approach. No Anti-corruption' (page 42), 'Our approach to materiality and report content' (page 36). G4-SO3 Total number and percentage of operations assessed for risks related to corruption and the significant risks identified. No 'Anti-corruption' (page 42). SUB-CATEGORY: PRODUCT RESPONSIBILITY Material aspect: Customer health and safety. G4-DMA Generic disclosures on management approach. No Product responsibility' (page 42), 'Our approach to materiality and report content' (page 36). G4-PR1 Percentage of significant product and service categories for which health and safety impacts are assessed for improvement. No 90% of produced products by value (excluding products that were traded and services). FP5 Percentage of production volume manufactured in sites certified by an independent third party according to internationally recognized food safety management system standards. No Product responsibility' (page 42). Kernel Holding S.A. Annual and Accounts 30 June

50 Strategic Introduction Kernel Holding S.A. is a holding company for the Kernel group of companies, which includes Kernel Holding S.A and its subsidiaries (hereinafter the Group or the Company ). A public limited liability company (société anonyme), Kernel Holding S.A., was incorporated on 15 June 2005, under the laws of the Grand Duchy of Luxembourg (RCS Luxembourg B109173) and has been the holding company of the Group since incorporation. The Company s shares are listed on the main market of the Warsaw Stock Exchange (Bloomberg ticker: KER PW) since November Kernel Holding S.A. s registered address is 19 rue de Bitbourg, L-1273 Luxembourg. The list of the Company s primary subsidiaries is presented on page 68 of this report. Kernel Holding S.A. has a single class of shares, all ranking pari passu, having equal voting rights and no special control rights attached to any of the shares. As of 30 June 2016, there were 79,683,410 ordinary shares issued and fully paid. Four shareholders owned more that 5% of the Company s share capital as of 30 June 2016, based on the notifications received from them: The Company did not own any of its own shares as of 30 June As a part of the management incentive program, the Company grants options to the management team. As of 30 June 2016, there were a total of 7,407,820 options outstanding, out of which 4,057,820 were vested, with each option representing the right to acquire one ordinary share of the Company. The Company s system of governance is defined in its articles of association, available on Kernel s website. Fully adhering to the corporate law of the Grand Duchy of Luxembourg, Kernel Holding S.A. also voluntarily aims to comply with the Best Practice for companies listed on the Warsaw Stock Exchange and the Ten Principles of issued by the Luxembourg Stock Exchange, with ea few exceptions, mentioned further in the text. Kernel s corporate objective is to become the leader of global agribusiness and make the Black Sea region a key supplier of agricultural products to the world market, and Kernel does that by developing the potential of its people. Therefore, in pursuing its corporate objective, Kernel strives to commit to the highest levels of governance, namely fostering a culture that values and rewards exemplary ethical standards, personal and corporate integrity and respect for others. For Kernel, governance assures the following: executives are leading and managing effectively, as well as acting ethically for the shareholders and other stakeholders; the business is taking the right direction; adequate, effective and transparent communication with investors and analysts; efficient internal control, risk management and compliance system in place, to identify, manage and mitigate risks. Finally, the Company s balanced approach to the Board s composition ensures that governance is continuously reviewed to guarantee that appropriate safeguards are in place to protect shareholders interests. Shareholders owning above 5% of the Company Shares owned Percentage owned Namsen Limited 31,345, % Cascade Investment Fund (1) 3,984, % Nationale-Nederlanden PTE S.A. (2) 4,786, % TFI PZU S.A. (3) 4,119, % structure Board of Directors Responsible for the overall conduct of the Group s business and strategy, and: Is vested with the broadest powers to perform all acts of administration and disposition in compliance Is responsible for the long-term success of the Company Is responsible for ensuring the effectiveness of and reporting on the system of corporate governance Is accountable to the shareholders for the proper conduct of the business Executive management team Focuses on strategy implementation, financial and competitive performance, commercial and technological developments, succession planning and organizational development Nomination and remuneration committee Sets, reviews and recommends Kernel s remuneration policy and strategy for members of the Board and Executive Management Team, as well as reviews the implementation of that policy Audit committee Assists in ensuring effective governance over Company s financial results and reviews the integrity, adequacy and effectiveness of Kernel s system of internal control and risk management (1) As of 13 October 2015, when the fund notified of crossing the 5% threshold. (2) As of 9 June 2014, when the fund notified of crossing the 5% threshold. (3) TFI PZU SA with its registered office in Warsaw, Poland, acting on behalf of investment funds under management: PZU Fundusz Inwestycyjny Otwarty Parasolowy, PZU Specjalistyczny Fundusz Inwestycyjny Otwarty Globalnych Inwestycji, PZU Specjalistyczny Fundusz Inwestycyjny Otwarty Universum, PZU Fundusz Inwestycyjny Zamkniety Akcji Focus, PZU Fundusz Inwestycyjny Zamkniety Dynamiczny crossed 5%threshold of share capital as of 21 June 2016, according to the fund s notification. Kernel Holding S.A. Annual and Accounts 30 June

51 continued Board of directors The board of directors (hereinafter the Board ) is the ultimate decision-making body except for the powers reserved to the shareholders meeting by law, or as specified in the Company s articles of association. Nevertheless, the Board is vested with the broadest powers to perform all acts of administration and disposition in compliance with the Company s corporate objective. Moreover, the Board resolves to take its decisions objectively and in the best interest of the Company. The Board is responsible to shareholders for the performance of the Company. Therefore, its role includes the establishment, review and monitoring of strategic objectives, approval of major acquisitions, dispositions and capital expenditure, and overseeing the Group s system of internal control, governance and risk management. In addition, the Board receives regular presentations from the executive management team, as well as from directors of key group functions enabling to explore specific issues and developments in greater detail. The schedule of matters, reserved for the Board include: revision and approval of financial statements and presentation of an annual report to the shareholders at a general meeting; revision of matters to be resolved by the general meeting of shareholders; supervision of internal controls and the audit functions; approval of any material agreements between the Company and its related parties; interim dividend decisions. Board composition The Board currently comprises a chairman, four executive directors and three non-executive directors. The Remuneration & Nomination Committee regularly reviews the composition of the Board to ensure that Kernel has an appropriate and diverse mix of skills, experience, independence and knowledge of the Group. Moreover, the Company believes that diversity amongst directors contributes to a high performing and effective Board. Board diversity Over the last few years, Kernel has met terms of gender diversity, with more women filling senior management positions across all major divisions of the Company. As of 2016, the Board has employed a diversity policy to assist in keeping diversity at the forefront of the Board s mind when considering its composition, whilst also driving initiatives across the business. As Kernel continues to pursue its strategy, it is ever more important to ensure the Board has international experience and outlook, and that the management is reflective of the customers and communities which Kernel serves. As in previous years, as a part of the Company s annual evaluation of Board performance, all Directors were consulted on the composition of the Board, as to size, the appropriate range of skills and balance between executive and nonexecutive directors. Board activities and meetings The Board has held seven scheduled and one unscheduled meeting during the last year ended 30 June Typically, at each meeting, the Chairman of the Board and Chief Officer report to the Board on the subjects of strategy implementation. The Board also discusses the strategy by means of received reports on each of the functions and main businesses. Moreover, it may also receive from the Company Secretary an update on any relevant corporate governance matter. The Board allocated its time at scheduled meetings during the financial year to the following: discussing and reviewing reports from the Chairman on strategic progress, matters considered by Executive management team and competitor activity analyzing reports from the Chief Officer on the financial position of the Company, which included operating updates, segment results and liquidity updates throughout the financial year, thus accompanying the existent strategy reviewing and discussing reports from each of the Board s committees receiving and analyzing reports on risk management and legal risks approving the full year and half-year results of the Company acknowledging a report on the effectiveness of the Board following performance review receiving reports on the governance issues and updates on changes in company law The majority of directors attended all eight meetings occurring during the periods. 12% 13% 12% 25% 63% Tenure 25% Gender 25% Age 75% 50% less than 5 years 5 years more than 5 years Male Female Kernel Holding S.A. Annual and Accounts 30 June

52 continued Strategic Independence The Company follows directors independence criteria set up in Annex II of the European Commission Recommendation of 15 February To fulfil the criteria of independence, the director should: not be an executive director (or manager) of the Company or an associated company, and have not been in such a position over the past five years; not be an employee of the Company or associated companies, and have not been in such a position during the past three years; not receive and have not received significant additional remuneration from the Company or associated companies apart from a fee received as an independent director; not represent and have not represented in any way a strategic shareholder with a ten per cent or greater holding; not have and not have had within the last financial year a significant business relationship with the Company or associated companies, either directly or as a partner, shareholder, director or senior employee of a body that has such a relationship; not be and have not been during the last three years a partner or employee of the present or former external auditor of the Company or associated companies; not be executive directors (or managers) at another company at which an executive director (or manager) of the Company is an independent director and not have other significant links with the executive directors (or managers) of the Company due to positions held at other companies or bodies; have not served on the Board as independent directors for more than twelve years; and not be close family members of an executive director or manager. The non-executive directors are experienced and influential individuals from a range of industries and countries. Their mix of skills and business experience is a major contribution to the proper functioning of the Board and its committees. All directors are equally accountable for the proper stewardship of the company s affairs. The non-executive directors have a particular responsibility for ensuring that the business strategies proposed are fully discussed and critically reviewed. This enables the directors to promote the success of the company for the benefit of its shareholders as a whole, whilst having regard to, among other matters, the interest of employees, the fostering of business relationships with customers, suppliers and other stakeholders, as well as promoting the impact of the company s operations on the communities in which the business operates and the environment. Conflict of interest The board of directors adopt procedures for authorization of existing and for considering (and authorizing where appropriate) new situations which may give rise to a conflict of interest on the part of any director. For instance, these rules provide statutory duties, which include, but are not limited to the following: a duty not to accept any benefits from third parties, which give rise to a personal interest and/ or gain; a duty to disclose any interest in a proposed transaction or arrangement with the Company and a separate and independent duty to disclose any interest in an existing transaction or arrangement with the Company; a duty to avoid conflicts of interest unless authorized. The procedures give guidance to directors as to what situations may be affected and of their obligations to notify the Company s Board of any such instances. Moreover, those directors shall refrain from deliberating or voting on issues concerned in accordance with relevant legal provisions, except for everyday transactions entered into under normal conditions. Any abstention due to a conflict of interest shall be indicated in the minutes of the meeting and disclosed at the next general meeting, in accordance with applicable legal provisions. Notwithstanding any contrary provision, any material agreement between the Company and its related party must be approved in advance by the Board, with at least one independent director voting in favor of such resolution. Nomination, appointment and re-election In accordance with the Company s articles of association, all directors are appointed by the shareholders at the annual general meeting, which determines their number, remuneration and term of office. The term of the office of a director may not exceed six years and the director shall hold office until his or her successor is elected. Directors may be re-elected for consecutive terms of office. The directors are elected by a simple majority vote of the shares present or represented. Any director may be removed at any time with or without cause by the general meeting of shareholders. The Board plans its own succession with the assistance of the Nomination & Remuneration Committee. In doing so, the Board: considers the skills, competencies, knowledge and experience necessary to allow it to meet the strategic vision of the Company; assesses the skills, knowledge and the experience currently presented; identifies any competencies, knowledge and experience not adequately represented and agrees the process necessary to ensure a candidate is selected who brings those qualities; evaluates how board performance might be enhanced, both at an individual director level and for the board as a whole. When considering new appointments to the Board, the Nomination & Remuneration Committee, among other matters, oversees the preparation of a position s specification. For details regarding nominations, refer to page 56, outlining details on Nomination & Remuneration Committee operations. Newly nominated directors must submit themselves to shareholders for election at the first annual general meeting, following their nomination. Kernel Holding S.A. Annual and Accounts 30 June

53 continued Strategic Board committees Following good corporate governance practice, the Board of directors must have a number of specialized committees in place, to ensure that it performs its duties effectively. This structure contributes to diversification of the workload, thus allowing motions and resolutions on certain material issues to be heard first by a specialized and independent body with explicit professional expertise, which can therefore filter accordingly and report on its decisions. The main objective is to guarantee the required objectivity and ensure that motions are discussed thoroughly before being passed by the Board. Therefore, the Board has created two special committees: the Audit Committee and the Nomination & Remuneration Committee. On an annual basis, the Board reviews the necessity to establish any new committees. Board evaluation In accordance with the Ten Principles of issued by the Luxembourg Stock Exchange, the Board assesses its operating methods and relationship with the executive management. The evaluation is conducted through an online questionnaire with each director anonymously assessing the Board s effective fulfillment of its merit, composition, organizational structure and its effectiveness as a collective body, among other things. The evaluation of the Board takes place in autumn each year (the most recent took place in October 2015 related to performance of the Board during the FY2015), and the Board is due to decide on a self-evaluation procedure for its committees. Executive management team Kernel s daily operations are managed by an executive team of ten managers, employed by the Company s subsidiaries, who are responsible for the operating segments and support functions. The full list with short biographies is available on Kernel s website, kernel.ua/en/management. secretary and independent advice All directors are able to consult with the corporate secretary. The corporate secretary is available to provide assistance and information on governance, corporate administration and legal matters as appropriate. Directors may also seek advice on such matters, or on other business related matters, directly from independent professional advisors if so desired at the Company s expense relating to the performance of his duties. Accountability and audit Going concern The Group s business activities, together with the factors affecting its performance, position and future development are set out in the strategic report on pages The financials of the Group, its liquidity position, borrowing facilities and applicable terms are described in the financial statement accounts. Current economic conditions have fostered the development of a number of risks and uncertainties for the Company, in particular in regards to global commodity prices and harvest expectations. Details can be seen in the Risks and Uncertainty section of this report, pages The directors have reviewed the current and projected financial position of the Company, making reasonable assumptions about the future trading and production performance, as well as debt requirements. The results show that the Company should be able to operate within the levels of its available capital. Therefore, the Board has a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Accordingly, the Board continues to adopt the going concern basis in preparing the annual report and accounts. Risk management At Kernel, risk management is defined as a process, realized by the Board, members of the executive management team, and other staff which starts from strategy development and impacts all activities of the company. This activity aims at risk identification and management in order to provide reasonable assurance of the company s achievement of goals. As a part of annual strategy management, Kernel identifies and manages key risks through the development of detailed management and mitigation plans. This process involves the identification, prioritization and development of management and mitigation actions. For details regarding risk management, refer to pages of this report. Audit Committee Being independent from the Company, the Audit Committee is able to oversee the affairs of Kernel, thus ensuring that the Company conducts its business ethically and responsibly, specifically in the areas of financial reporting, internal control and risk management. The key objective of the Audit Committee is to provide effective governance over the fairness of the Company s financial reporting including the adequacy of related disclosures, the performance of both the internal audit function and the external auditor, as well as to oversee the Group s system of internal controls, business risks and related compliance activities. The Audit Committee consists of three independent non-executive directors, headed by the chairman of the committee. All members are appointed by the Board from the pool of independent directors. The Audit Committee prepares recommendations and drafts resolutions on the issues that relate to its competence and presents them to the Board for consideration. Besides the latter, the committee s responsibilities include, but are not limited to the following: assisting the Board in monitoring the reliability and integrity of financial information provided by the Company, in particular by reviewing the relevance and consistency of the accounting standards applied by the Company, including consolidation criteria; assisting the Board in formulating a description of the risks specific to the Company; assisting the Board in the implementation of a risk control system; making recommendations regarding the internal auditor s work program; monitoring the effectiveness of the internal audit function; making recommendation to the Board regarding the selection, appointment and reappointment, and dismissal of the external auditor; monitoring the independence and objectivity of the external auditor; examining the nature and scope of the nonaudit services to be provided with a view to avoid any conflict of interest. The Audit Committee met on five occasions over the course of financial year Its main activities have been directed toward the integrity of the Company s financial accounting and reporting together with a related external audit, as well as the periodic revision of the implementation of a risk mitigation plan. Meeting its primary function of providing support to the Board, the main activities discussed and analyzed by the committee can be grouped into the following different areas of competency (see next page): Kernel Holding S.A. Annual and Accounts 30 June

54 continued Strategic reports Quarterly, semi-annual and annual financial reports. Critical accounting policies. External audit Annual audit plan and areas of focus. Management letter review. Face-to-face discussion with auditors in absence of executives. Review of the contract with the auditors. Internal audit Quarterly reports on internal audit projects and recommendations implementation dynamics. Projects planning on semi-annual basis. Face-to-face discussion in absence of executives. Risks Top risks identification. Group risk process. Periodic reports on risk mitigation plan implementation. Compliance Review of compliance with best corporate governance practices. Monitoring compliance of subsidiaries outside of Ukraine and Russian with local accounting standards. Following each meeting of the committee, the chairman of the Audit Committee makes a report to the Board identifying issues which he considers need action or improvement is called for or makes recommendations on necessary adjustments in internal regulations if required. The internal and external auditors have free access to the audit committee in the ordinary course of business. Periodically, the audit committee meets the auditors in the absence of executives. Internal audit Internal audit undertakes both regular and ad hoc reviews of risk management controls and procedures, as well as assists the personnel and management of the Company in improving the risk mitigation and internal control systems. The Company s internal audit function, directed by experienced head of internal audit, reports to the Board and works closely with the Audit Committee. The key objective objective of internal audit is to provide independent and objective evaluations of the effectiveness and efficiency of risk management and internal control systems within the operational and financial framework of the Company, in the area of IT and internal and external regulations observance. Internal audit is one of the components of corporate governance, risk management and internal control systems that assure transparency of the Company s performance to the Board, audit committee, management and shareholders. Its major responsibilities include, but are not limited to: assisting personnel and management of the Company in improving the effectiveness of risk management and internal control systems; advising management regarding the effective execution of their responsibilities; consulting management on the subjects of specific improvements in policies and internal procedures; ensuring open communication among both internal and external auditors, management and personnel, the Audit Committee and the Board. During the reporting period, internal audit provided reasonable assurance on key controls in such operational processes as bottled sunflower oil production, grain management at the silo division, management of fixed assets, utilization of GPS tracking systems and the procurement of sunflower seed and grain at the Russian business division. As well, the department also followed closely the progress of the implementation of the recommendations issued during previously completed audits. The audit committee of the board of directors reported it was satisfied with the progress of audit projects and with management s response actions. Internal audit cooperates with the external auditor, with the procedures in place to ensure internal audit periodically meets with the external auditor in the absence of executives. External auditor The Company s annual consolidated and standalone accounts are audited by an external auditor appointed by the annual general meeting of shareholders. On 10 December 2015, the general meeting of shareholders appointed Deloitte Audit S.a.r.l., having its registered office at 560 rue du Neudorf, L-2220 Luxembourg, registered with the Luxembourg Trade and Companies Register under number B67895, as independent auditor of the consolidated and unconsolidated annual accounts of Kernel Holding S.A. for the year ended 30 June Deloitte has audited the Company s accounts since the financial year ended 30 June The Audit Committee regularly meets with the auditors, including meetings without the presence of executive management, to discuss the audit process and management letter among other things and makes recommendations on the external auditor s work program. The amount of non-audit services provided by external auditors amounted to USD 18 thousand during the year ended 30 June 2016 (USD 33 thousand a year ago), compared to the audit fees of USD 500 thousand in FY2016 (USD 432 thousand a year ago). While services are authorized ex officio, the Audit Committee periodically examines the nature and scope of the non-audit services provided with a view to avoid any conflicts of interest. During financial year 2016, the Board has adopted policy outlining the provision of non-audit services by the external auditor, with an aim to mitigate the risks of impairment of external auditor s independence. In essence, the external auditors independence is deemed to be impaired if the auditor provides services which: result in the auditing of their own work by the auditor; result in the auditors acting as a manager or employee of the Company or any affiliated entity; put the auditor in the role of advocate for the Company; create a mutuality of interest between the auditor and the Company. Therefore, Kernel addresses these issues by employing the following safeguards: disclosure of the extent and nature of non-audit services; prohibition of selected services; prior approval by the audit committee of non-audit services The policy s definition of prohibited non-audit services corresponds with the European Commission s recommendations on auditors independence and ongoing EU audit market reform. Kernel Holding S.A. Annual and Accounts 30 June

55 continued Strategic policies, values and compliance A Code of Conduct that includes corporate values is distributed throughout the Company. Relevant employees meet regularly to discuss external changes in regulatory, legal and financial environment in which Kernel operates, to ensure its compliance with new legislations. The Board, through an Audit Committee, has reviewed the effectiveness of the internal controls of the Group. Moreover, there is an ongoing process of identifying, evaluating and managing significant risks encountered by the Company. A reporting structure has been in place throughout the year and up to the date of approval of the financial statements and is regularly reviewed by the directors. Kernel follows insider dealing and market abuse regulations applicable to issuers listed on the Warsaw Stock Exchange as well as the respective regulation under Luxembourg law. In particular, all members of the board of directors and executive managers are required to disclose to the Company, to the Commission de Surveillance due Secteur Financier and to the Polish Supervision Authority all of their transactions involving the Company s shares or share options, within a three-day period after such transactions reach a cumulative value equivalent of five thousand euros. Further to this notice, the Company notifies the stock exchange and posts respective information on its website. The Company also adopted an insider trading manual, which broadens the group of persons to which insider dealing regulations apply, defines restricted periods for transactions with the Company s shares and options, and specifies dealings with insider information. The Company keeps and regularly updates the list of people that have access to inside information. The Company s dividend policy is to maintain a sustainable annual dividend of USD 0.25 per share, payable in US dollars. The dividend of USD 0.25 per share for FY2015 was distributed on 29 April 2016 to shareholders on the register at the close of business on 22 April Kernel recognized the benefits of having a diverse senior management team and sees increasing diversity at the senior level as an essential element in maintaining an effective Board. As of 2016, Kernel has adopted its board of directors diversity policy, which was developed to ensure that there is broad experience, competencies and knowledge on Kernel s Board. The development and implementation of such policy has been considered from a number of aspects including, but not limited to gender, age, cultural and educational background, expertise, professional experience, skills, knowledge and length of service. The Nomination & Remuneration Committee reviews and assesses the Board s composition on behalf of the Board and recommends the appointment of new directors, when necessary. Takeover disclosure The Company s shares are in electronic form and are freely transferable, subject only to the provisions of law and the Company s articles of association. There are no agreements between the Company and its employees or directors providing for compensation of the loss of office or employment (whether through resignation, purported redundancy, or otherwise) that would occur because of a takeover bid. Options granted under management incentive plans incorporate accelerated vesting in the event of a takeover. The Company in the ordinary course of business has entered into various agreements with customers and suppliers around the world. Some of the Company s borrowing agreements, which either by their nature or value may represent significant agreements, do provide for the right of termination upon a change of control of the Company. The commercial sensitivity of these agreements prevents their details from being disclosed. Save the preceding disclosure, there are no other significant agreements to which the Company is a party that take effect, alter, or terminate upon a change of control following a takeover of the Company. Remuneration The Board and Nomination & Remuneration Committee continues to review and assess the remuneration arrangement and plans of Kernel continually, ensure that they are aligned with both the Company s strategy and shareholders interests, while complying with regulatory requirements. Core principles and compensation governance: Compensation policies and plans at Kernel reward performance, sustainable growth and long-term shareholder value creation. Moreover, the remuneration programs for the Board and executive management team are competitive, internally equitable and straight-forward. Remuneration policy, programs and amounts are reviewed by the Nomination & Remuneration Committee annually and, if necessary, adjusted by the Board of Directors. Nomination & Remuneration Committee The Board of Directors define the functions of the Nomination & Remuneration (hereinafter NRC ). The NRC supports the Board in nominating and assessing candidates for positions to the Board and to the executive management team, in establishing and reviewing the compensation strategy and principle and in preparing the respective proposals to the shareholders general meeting regarding remuneration of the Board. The members of the NRC are appointed by the Board from the pool of directors. NRC consists of a maximum of three members, including the Chairman of the committee, who is elected by the appointed NRC members. Key objective The main objective of NRC is to assist in reviewing, advising and making recommendations to the Chairman of the Board and the Board itself on its membership structure and respective levels of compensation for individual members of both the Board and executive management team. Kernel Holding S.A. Annual and Accounts 30 June

56 continued Strategic Responsibilities The NRC is responsible for the following activities and submits all proposals concerning these activities to the Board, which has the final decision authority. Those major activities include, but are not limited to the following: The NRC meets as often as business requires. During the financial year ended 30 June 2016, the committee held two meetings, which were attended by all members. The NRC meetings are not recorded due to confidentiality reasons. Following each meeting of the NRC, the committee s chairman is required to report to the Board of Directors identifying the issues which he considers require action or improvement and makes recommendations for the necessary adjustments in its internal regulations if required. Compensation principles Remuneration of the Board is fixed and does not contain any performance-based variable component. This ensures that the Board is truly independent in fulfilling its duties toward executive management team. Although, the Board s members are reimbursed for certain travel, hotel and other expenses related to the exercise of their directorship duties, they are not granted any pension, retirement, or similar benefits by the Company. The total remuneration of the Board is approved at the annual general shareholders meeting. Remuneration of the executive management team is driven by the main principle of pay-forperformance. Therefore, the compensation policy and programs are designed to reward performance, sustainable growth, and long-term shareholder value creation, while offering competitive remuneration to be able to attract and retain highly qualified employees. The compensation of executive management team is determined by the chairman of the Board Anriy Verevskyy and is reviewed by NRC annually, and, if necessary, adjusted and approved by decision of the Board based on proposal by the NRC. In line with the pay-for-performance principle, a significant portion of compensation consists of variable incentives based on performance. The elements of the remuneration of the executive management team are summarized in the table on the right: Nomination advising on an appropriate size and composition of the Board recommending transparent procedures for nomination and selection of non-executive directors of the Board listing of necessary and desirable competencies of the directors overseeing the development and implementation of processes for evaluating the performance of the Board developing a succession plan for the Board and executive management team proposing an induction program Remuneration of the board of directors, in USD thousands Each option is granted non-vested, with a vesting period from three to five years, carrying no rights to dividends, voting and to be executed in cash. As of 30 June 2016, there are a total of 7,407,820 options are outstanding, with 4,057,820 being vested. During the year ended 30 June 2016, there were no new management incentive plans proposed. For details of the option plans, refer to Note 2 to the financial statement on page 69. Remuneration advising on remuneration policies and compensation of directors and members of the executive management team proposing key terms of appointment for directors and members of the executive management team recommending incentive policy packages for directors and members of the executive management team developing management incentive schemes advising on the professional indemnity and liability insurance for directors and members of the executive management team Group of directors FY2016 FY2015 FY2014 Chairman of the Board Three non-executive directors Four executive directors Total board of directors Base salary Short-term variable bonus Long-term management incentive plan Members of the executive management team are granted no pensions, retirement or similar benefits by the Company. Remuneration for the executive management team of Kernel, totaling ten people, amounted to USD 6,476 thousand during the year ended 30 June 2016, compared to USD 8,564 thousand a year ago (14 people). The fixed salary is determined at the discretion of the Board on the basis of the market value of the respective position and the individual profile of the incumbent in terms of qualifications, skill set, and experience. All amounts are fixed and paid in cash on a monthly basis. The bonus rewards the financial performance of the Company and/or its businesses, as well as the achievement of individual performance objectives over a period of one year. The target bonus expressed as a percentage of EBITDA minus financial expenses, with a minimum threshold level required to activate the payout. The management incentive plan rewards performance of the Company over the long-term period and aligns the interests of executive management team with those of the shareholders by delivering a substation portion of the compensation as company share options. The plan is duly reviewed by NRC and approved by the Board. Kernel Holding S.A. Annual and Accounts 30 June

57 continued Strategic Investor relations Kernel places considerable importance on communications with shareholders and responds to them on a wide range of issues. Moreover, the Company maintains regular contact with its investors through its investor relations team. All materials, presentations and reports are available to shareholders through the Company s website, kernel.ua. Annual general shareholders meeting Under Luxembourg company law, the Company s annual or extraordinary general meetings of shareholders represent the entire body of shareholders of the Company. The general meetings of shareholders have the broadest powers and resolutions passed by such meetings are binding for all shareholders. Any shareholder who is recorded in the Company s shareholder register at least fourteen days before a meeting is authorized to attend and vote at the meeting. Each share is entitled to one vote at all general shareholders meetings. The date of the annual general meeting, as fixed in the Company s articles of association is 10 December or the next business day should such a date be a legal holiday. The proposed agenda for the shareholders meeting is published along with a convening notice at least 30 days before the meeting on, among other places, the Company s website. A notice period of 17 days applies in case of a second or subsequent convocation of the general meeting convened for a lack of quorum required for the first meeting to be convened. One or more shareholders holding at least 5% of shares can put topics on the agenda of the annual meeting of shareholders and propose draft resolutions, with such proposals to be made no later than 14 days prior to the meeting of shareholders. As per Luxembourg corporate law, shareholders may opt to participate in the general meeting via proxy or by sending a completed voting form. Both forms are published by the Company along with the convening notice on the Company s website, kernel.ua. The proxy does not have to be a shareholder of the Company. As shareholders historically participate in the general meeting through voting and proxy forms, there is no major representation of the Board and executive managers at the meeting, while they are available to shareholders for discussion in the ordinary course of business. Unless otherwise provided by law, resolutions of the meeting of shareholders are passed by a simple majority vote of shareholders present or represented. During the annual general meeting held on 10 December 2015, the Company approved the management report and annual accounts for the financial year ended 30 June 2015 and approved the Board s proposal to distribute USD 0.25 per share dividend. The meeting also granted discharge to the directors of the Company and its independent auditor, while it also renewed the mandates of seven of the Company s directors, approved directors remuneration, and reappointed Deloitte Audit S.a.r.l. as its independent auditor. During the year ended 30 June 2016, the Company held one extraordinary general meeting on 10 December 2015 acknowledging the Board s report of the Company with respect to the creation of the authorized capital and granting a new authorization to the Board to issue, from time to time, up to 7,407,820 new shares without indication of nominal value. Investor calendar Q1 FY2017 operations update...24 October 2016 Q1 FY2017 financial report November 2016 Annual general meeting of shareholders December 2016 Q2 FY2017 operations update January 2017 H1 FY2017 financial report...28 February 2017 Q3 FY2017 operations update...20 April 2017 Q3 FY2017 financial report...30 May 2017 Q4 FY2017 operations update July 2017 FY2017 financial report...23 October Kernel Holding S.A. Annual and Accounts 30 June

58 Board of Directors Effective and experienced leadership Kernel Holding S.A. is governed by the Board of Directors, composing of eight directors (incl. three non-executive independent directors). Biographical details of the board and executive management team as at 30 June 2016 are as follows (with details available at kernel.ua/en/management/directors/) Andriy Verevskyy, 42 Chairman of the Board Ton Schurink, 70 Non-executive independent director Andrzej Danilczuk, 53 Non-executive independent director Sergei Shibaev, 57 Non-executive independent director Tenure: 9 years Skills and experience: Founded the Group s business in 1995, holding various executive positions within the Group. Presently, he oversees the strategic development and overall management of the Group. Tenure: 9 years Skills and experience: Extensive experience in trading commodities, risk management, barter, shipping, financial trading and trade and structured finance acquired during a 32-year career with Cargill. Tenure: 9 years Skills and experience: Rare know-how which combines a very good understanding of western corporate culture and modus operandi with a deep knowledge of local culture and business practices in the Black Sea region. Tenure: 4 years Skills and experience: Occupied different managerial roles with international consultancy and financial services firms including PWC, ING Barings, Deloitte & Touche and Roland Berger, among others. Board Committee: Nomination & Remuneration Committee. Board Committee: Chairman of the Nomination & Remuneration Committee, Audit Committee. Board Committee: Nomination & Remuneration Committee, Audit Committee. Board Committee: Chairman of the Audit Committee. Anastasiia Usachova, 45 Chief financial officer Kostiantyn Lytvynskyi, 43 Chief operating officer Viktoriia Lukianenko, 41 Chief legal officer Yuriy Kovalchuk, 35 investment director Tenure: 9 years Skills and experience: Ms. Usachova holds a MBA degree from IMD (Switzerland), CMA and CFM certification from the Association of Accountants and Professionals in Business (IMA). Tenure: 5 years Skills and experience: Mr. Litvinskyi is responsible for the export of grains and sunflower oil, raw material procurement, purchase of grains and logistics. Tenure: 9 years Skills and experience: Ms. Lukianenko is responsible for providing legal advice and counseling in all aspects of Kernel s business operations. Tenure: 5 years Skills and experience: Mr. Kovalchuk is responsible for investor relations and management of investment projects. Yuriy has been a Fellow with Association of Chartered Certified Accountants (FCCA), since September Board Committee: None. Board Committee: None. Board Committee: None. Board Committee: None. Kernel Holding S.A. Annual and Accounts 30 June